Lok Sabha Election 2024: 5 key investment strategies amid market volatility

As India approaches a significant electoral event, the stock market exhibits notable volatility. This period of uncertainty demands a strategic investment approach. The Nifty 50 index, a benchmark for Indian equities, has recorded a modest increase of just 2.5% year-to-date. 

This is below the expected 4%-5% rally, reflecting cautious investor sentiment despite the current government’s re-election predictions. Several factors are responsible for this cautious outlook, including global economic dynamics and the attractiveness of competing markets like China. 

Let us look at a prudent strategy for navigating this volatility and identify key sectors poised for growth post-elections.

Investment strategy in uncertain times: Given the unpredictability surrounding election outcomes, a balanced investment approach is advisable. A recommended strategy is to allocate 50% of available investment capital now and reserve the remaining 50% for post-election adjustments. 

This phased investment can help mitigate risk while allowing for strategic positioning based on election results. Systematic investment plans (SIPs) should continue uninterrupted, leveraging their inherent advantage of averaging out market volatility over time.

Investors should be particularly cautious with small-cap stocks, which appear overvalued. Mid-cap stocks are moderately valued and present a balanced risk-reward profile. Large-cap stocks, being more stable and better valued, should form the core of the investment portfolio during this volatile period. Thus, a diversified allocation with a focus on large-cap and select mid-cap stocks is prudent.

Sectoral focus for post-election growth: Post-election market performance will significantly depend on the electoral outcomes and the subsequent economic policies. Historical trends and current political manifestos suggest two primary sectors with promising prospects: manufacturing (under the China +1 strategy) and infrastructure.

Manufacturing sector

• Defence: With increasing emphasis on self-reliance and national security, defence manufacturing is set to benefit from policy support and increased budget allocations. Investments in defence production and supply chain companies are likely to yield positive returns.
• Chemicals: The chemical industry, essential for various manufacturing processes, stands to gain from the global reorientation of supply chains. The China +1 strategy, which aims to diversify supply sources beyond China, positions Indian chemical manufacturers favourably.
• Semiconductors: As technology adoption accelerates, the semiconductor sector presents significant growth opportunities. Investments in semiconductor manufacturing and allied services will benefit from domestic demand and global supply chain shifts.

Infrastructure sector: Infrastructure development is crucial for economic growth and employment generation. Both major political parties in India have prioritised infrastructure in their manifestos, ensuring continued investment and development irrespective of the election outcome.

Investments in companies involved in construction, road building, and urban development projects are likely to be profitable. These firms will benefit from government contracts and increased spending on public infrastructure projects.

Balancing risks and opportunities: Investors should remain aware of the inherent risks associated with electoral outcomes. A positive outcome, such as the re-election of the current government, may spur market rallies, creating favourable conditions for further investments. Conversely, a change in government could induce market corrections of up to 15% to 20%, presenting risks and potential buying opportunities at lower valuations.

In summary, a judicious approach to investment amid election-driven volatility involves a phased investment strategy, continued SIPs, and a focus on undervalued large-cap and mid-cap stocks. Sectoral emphasis on manufacturing and infrastructure aligns with anticipated government priorities and global economic trends. 

By balancing investments between pre and post-election periods and targeting strategic sectors, investors can navigate market volatility effectively, optimising returns while mitigating risks. This strategic framework aims to leverage the current market dynamics and anticipated policy directions, providing a robust foundation for navigating the uncertainties of the electoral cycle.

Anand K Rathi, Co-founder of Mira Money