Friday, December 6, 2013

7 reasons why investors should not worry about state election results

Q2 ‘13 results are out of the way. Current account deficit is moderating – thanks to much lower import of gold and higher exports due to the devalued Rupee. Inflation is still stubbornly high, which means there is little likelihood of a reduction in interest rates. Oil’s price has stabilised somewhat.

FIIs remain net buyers in the stock market. DIIs have consistently been net sellers. The market seems to have discounted tapering of QE3 bond buying by the US Fed. Belated effort by the Finance Minister to clear FDI projects is a case of too little too late.

Investors appear to be waiting for a new trigger that will propel Sensex and Nifty to new highs. Recent elections in four states and one union territory may provide that trigger – if newspapers and TV channels are to be believed.

Here are 7 reasons why investors need not bother about the election results:

1. Various exit polls conducted by different agencies commissioned by newspapers and TV channels haven’t been able to reach a consensus about the results. Exit polls often turn out to be incorrect.

2. The polls are conducted over a small ‘representative’ sample of the overall electorate. The samples used by different agencies are not the same; so they produce different results.

3. Past experience shows that state elections are fought on local issues, which may or may not have any relevance to national issues and concerns. There is very little link between the results in the state elections and results of the general election.

4. Every one seems to be expecting a sweep by the BJP-led NDA – if you believe the chatter in internet forums and the noise in TV channels. The market may have already discounted such an outcome. So, don’t expect the indices to jump up if the NDA does make a clean sweep.

5. Even if there is a NDA clean sweep and indices do jump up on Monday morning, profit booking is likely to set in. Any gains will be short-lived.

6. If the NDA fails to make a clean sweep, there may be a correction at best – but no sell-off. Investors should use the dip to add to their holdings.

7. Regardless of the impact of the election results on the stock market – and such an impact is going to be short-term at best – what really matters is the state of your own portfolio.

If you own fundamentally strong companies that have performed well through the years, your portfolio will continue to perform well. If you own ‘cheap’ stocks of companies with questionable managements, election results would be irrelevant. If you are confused by the volatility and shenanigans in the stock market, invest in tax-free PSU bonds.


Nasir Khambatta said...

how true, Subhankar. Thanks.

Subhankar said...

Thanks for your comment, Nasir.