Dear Advisory Client,
Going into May, market volatility will heighten on election results. A verdict to the opposition can lead to a sharp fall in markets by 25%, especially if there is infighting in the opposition on the choice of leaders. A hung parliament will again lead to sharp market fall on uncertainty of who will form the government. A majority verdict to the current NDA government is largely discounted in the market and while intially reaction will be positive, markets may then need to look at growth prospects this year, which is not looking very bright given the initial results from corporates. Hence, buying into the market at such levels on expectations of NDA government being reelected may not be a good risk return trade
Equity markets have bounced back to all time highs with S&P 500 hitting record highs and Sensex & Nifty trending close to record highs. US corporate profits are still robust and are driving up markets even as the Fed is staying put on rate hikes. In India, speculation on elections 2019 providing continuity to the present NDA government is driving up the markets. Corporate performance has been mixed so far, as seen by initial 4th quarter 2018-10 results and guidance has not been too optimistic.
The markets are still cautious and many stocks are trading 30% to 40% off all time highs seen in 2018. The highly speculative stocks have come off sharply, over 50% from highs while other stocks have seen corrections in valuations, that were elevated in a small and mid cap bull run. Chart 1.
Cautious markets are good for long term portfolios, as stocks with future growth potential despite temporary headwinds are available at pessimistic valuations rather than optimistic valuations. The markets also provides time to pick and choose stocks with good fundamental research. Entry timing can also be calibrated without worrying about runaway stock prices.
The downside is also protected to some extent, as valuations have corrected. Such markets improve the risk and return profile of long term portfolios.