Oct 8, 2018
Attractive Times for Investing for Long Term Wealth Generation
While CY17 was a secular bull-run for equities, YTDCY18 has proved to be starkly different with sentiment nowhere near the euphoria of the last year. Arguably, valuations, global liquidity, trade conflict, rising interest rates and crude oil can be attributed as root causes. However, while post facto analysis and attribution is important, pre-emption i.e. rationally building a case for the future is equally if not more critical.
The Election data suggests that investors rarely lose money investing Pre-Elections
Across 7 elections in the last 27 years, whenever an investor entered the markets 6 months before the general elections and held on for 2 years, the investor made on average annualized returns of 23%, with most money made in the 2009 elections when the UPA Government held fort. While the least return has been a positive 1.5% in 1999 (when the incumbent party i.e. BJP won), this strongly implies that the 27-year track record has never yielded principal erosion when entering pre-elections.
Equities Deliver Stellar Returns During Changes at the Central Government
Net-net, irrespective of the incumbent Government remaining in power or a change at the centre, markets have shown resilience in the periods encompassing general elections over the past 27 years.
While India benefitted from a trinity of lower CAD, Inflation and Interest rates in the previous 3 years, these were amongst the best prints in recent times. In 2018, CAD was at 2.4% in Q1FY19 and averaged 1.6% in the previous six quarters. However, in Q3FY13, India’s current account deficit was 6.8% of GDP and averaged 4.3% in the previous six quarters. Oil prices were high but stable in 2013 and are rising from lows in 2018. Interest rates were high in 2013 and are not very far from levels in 2018. Inflation, however, was much higher in 2013 and is relatively benign in 2018. Hence the current macro scenario, is normalising for India, while markets continued gaining momentum earlier this year on the presumption of stable macros. On valuations, Indian equities still trade at nearly 11-13% premiums vs. 10-yr. history, however they have currently fallen nearly -12% from recent highs seen in the last couple of months. For the long run, equity markets turn out to be resilient wealth generators and given general elections are about 6-7 months away, the case for investing in these uncertain times becomes a bit clearer if we take past election period performance into consideration.