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Opinion | Do general elections warrant a change in fund portfolios?

  • Long-term investors in equity should not allow the general elections to trigger a change in their overall plans or asset allocation to deal with the volatility that accompanies such a short-term event

Long-term investors in equity should not allow the general elections to trigger a change in their overall plans or asset allocation to deal with the volatility that accompanies such a short-term event. The responsibility of managing the sharp swings and uncertainties surrounding the market lies with professional fund managers. Sunita Abraham asks fund managers if the general elections warrant a revision in the selection of stocks and sectors of a mutual fund, and to list out investment themes that can weather any election outcome well and is suited to bring some stability in a volatile market.

Elections are transitory, don’t warrant change in portfolio

Taher Badshah, Invesco Mutual Fund
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Taher Badshah, Invesco Mutual Fund

Taher Badshah, Chief Investment Officer, equities, Invesco Mutual Fund 

Our philosophy as an asset manager is to identify good businesses. From a portfolio construction perspective, we look at investing in businesses that display lasting competitive advantages, above-average growth rates over a fairly long period and reasonable valuations. More importantly, we identify companies that are able to demonstrate these qualities on a more consistent basis across business cycles and have the ability to withstand the impact of transitory events. From our investment process perspective, we treat elections as fairly transitory with relatively low implications for any business when considered over an investment horizon of two to five years.

Typically, the impact of elections on equity markets is seen over a narrow window of six months before and three months after the election outcome. While themes such as rural consumption driven by populist measures and infrastructure push attract investors, we do not see great merit in making meaningful changes to our portfolio for such short periods before or after elections.

2019 will be the year of systematic investment

S. Naren, ICICI Prudential Mutual Fund
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S. Naren, ICICI Prudential Mutual Fund

S. Naren, Chief Investment Officer, ICICI Prudential Mutual Fund

Election years typically tend to be volatile for equity markets, as was seen in 2004, 2009 and 2014. There is potential for volatility in 2019 as well. But markets are no longer overvalued. Both mid-caps and small-caps are more fairly valued today. In the large-cap space, barring about 10-odd mega-caps, the rest of the market has become relatively cheaper. We believe the best way to navigate this volatility is through systematic investment plans (SIPs). Hence, we recommend 2019 as the year of SIPs to investors.

We will prefer investing in stocks that are available at cheap valuations, with low leverage and where implied growth assumptions are low. We are positive on the banking space. The earnings cycle looks good. Clearly, there was a problem earlier since earnings have come down as a percentage of GDP. Going forward, we believe these numbers will improve.

There is need for increased financial savings in the economy since we believe it is not sustainable for the Reserve Bank of India to do open-market operations on this year’s scale.

Market volatility an opportunity for long-term equity investors

Roopali Prabhu, Sanctum Wealth Management
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Roopali Prabhu, Sanctum Wealth Management

Roopali Prabhu, Director and head of investment products, Sanctum Wealth Management

For the core portfolio, fundamental factors drive our decisions and our research indicates that election impact dissipates over longer investment horizons. The past year has seen big corrections in the small- and mid-cap space, and we are seeing pockets of value emerging. If the overall risk-return profile allows for adding exposure, any correction around elections could create entry opportunities for long-term investors.

Based on individual expectations around the election outcome, investors could utilize tactical overlays through exchange-traded funds. While election outcomes don’t generally determine long-term market returns, the outcome of certain themes (for example, infrastructure) are linked to government policies. Some themes such as consumption are relatively more insulated. We will focus on investment themes and sectoral allocations after clarity on the election result. However, weights to structural themes can be adjusted before the elections if the market offers reasonable entry valuations.

Stock selection will not depend on election outcome

Mihir Vora, Max Life Insurance
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Mihir Vora, Max Life Insurance

Mihir Vora, Director and Chief Investment Officer, Max Life Insurance

The broad market correction is hidden by the resilience in the Nifty which has been held up by about 10 stocks. Outside this narrow universe, the stock price declines have been very sharp. In a way, we have already seen a market correction.

In the run-up to the election, it looks like any combination of alliances is possible; so we would not place bets on any particular outcome. The history of 2004 (Nifty down 20% in two days) and 2009 (Nifty up 18% in a day) shows that election outcomes can be very unexpected. However, the priorities for any government will be the same—encourage investment, keeping consumption robust and reducing inequalities. It is also a source of comfort that some of the most important reforms in the Indian economy have happened in the era of coalition governments.

Our portfolio is biased in favour of consumer staples, private sector banks and exporters like information technology and pharma. We will look to add auto, capital goods and construction depending on data improving in these segments

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