NDA fails ’400 Paar’: Dalal Street faces worst crash in 4 years – 5 key tips for retail investors

The Indian stock market witnessed a seismic downturn recently, marking its steepest plunge in four years. The epicentre of India’s financial hub grappled with the fallout of the National Democratic Alliance (NDA) failing to secure the much-anticipated ‘400 Paar’ milestone in the political arena. As investors navigated this tumultuous day of trading, several factors contributed to the sharp decline:

1. Political uncertainty: The NDA, led by the Bharatiya Janata Party (BJP), had set ambitious objectives for the recent elections, aiming to surpass the formidable ‘400 paar’ milestone in the Lok Sabha. However, election results fell short of expectations, triggering waves of panic across the financial landscape.

2. Exit Polls got it wrong: The uncertainty surrounding the political landscape and its potential impact on economic policies and reforms sent shockwaves through the stock market. Investors grappled with the implications of a less decisive victory for the ruling coalition than initially projected. Most exit polls had projected a clean sweep for BJP and some even expected it to cross the “400 Paar” milestone, trapping many a retail traders who had carried forward leveraged long positions on the expectation of another rally validating the exit polls

3. Fear mongering: Nervous investors engaged in widespread panic selling , with the television media flashing BJP’s shocking as well as embarrassing defeat in UP and West Bengal further exacerbating the blood bath.

While fundamentally most stocks were expensive on valuations front, some failing to justify their price rise in absence of rise in earnings, technically too, the Index was always on tenterhooks. With overbought oscillators/ indicators on most stocks, multiple negative divergences on major indices like Nifty/ Bank Nifty, bearish candlestick patterns on weekly and monthly time frames the index was just waiting for a trigger to correct from the all the all time high levels. 

BJP, which never ran the government without a full majority since 2014, falling short of the majority for the first time in 10 years was the perfect trigger market was waiting for.

Now, with the damage already being done, what should a typical retail investor do in the current market scenario? Here with list out some actionable advice for a retail investor: 

1. Focus on earnings visibility: In times of crisis, focus on stocks with strong earnings visibility. While overall market volatility may cause even these stocks to fall, they tend to recover quickly. Companies with transparent financials and predictable earnings are resilient during market turbulence.

2. Lessened positions in the "400 Par" theme: Had BJP got full mandate, there was a strong case for PSU’s, defence, power stocks to extend their rally. However, with the given mandate it would be difficult to expect these stocks to rally with the same momentum. In fact, they could further experience more damage on the untoward sentiments. If your portfolio is overweight on them,consider selling them on rally or lighten positions in them. Technically most PSU, defence and power stocks have shown signs of topping out.

3. Patience pays off: Remember that money is often made during panics. Patience is crucial. Instead of succumbing to fear, consider market crashes as buying opportunities. History has shown that markets eventually rebound, rewarding patient investors. Buy quality stocks in large, mid-cap and small-cap spaces where there is earnings visibility. Consider increasing exposure in rural driven consumption stocks. Today's rally in stocks like HUL, Britannia, Nestle, Dabur could well be a start of a good run for hitherto sleeping FMCG companies

4. Diversification: Consider diversified index funds or ETFs. While individual stock picks can be exciting, broad market exposure provides stability. Diversification helps mitigate risks during market downturns. If you are new to investing, ETFs or mutual funds are your best bet.If you have time, inclination as well as the commitment to put in effort, individual stock picking will always be more rewarding.

To summarise, while the pain in the markets is here to stay for some time, Investors with a long term time view should remain invested in quality companies with proven earnings track record and future earnings visibility. India's story remains strong and while the unfavourable election outcomes are expected to derail the pace of progress, the long-term outlook very much remains positive.

Rahul Ghose, CEO of Hedged.in