Election outcome uncertainty, earnings: Should you sell in May and go away?

The month of May is traditionally considered bad for equity markets in Europe and the US, as fund managers typically go on a long summer vacation. Back home, the outcome of the ongoing general elections, corporate results, oil prices and rupee level are some of the key factors investors will monitor closely at a time when the indices are trading close to all-time highs.

In the past 10 years (since 2008), the S&P BSE Sensex has given a positive return on seven occasions. In 2009 the index rallied 28 per cent post election when the outcome saw the United Progressive Alliance (UPA) government take charge for the second consecutive term. May 2014 also saw the S&P BSE Sensex gain 8 per cent after Narendra Modi-led National Democratic Alliance (NDA) got an overwhelming mandate post the general elections.

So, should you ‘sell in May and go away?’

Indian markets, experts say, are already pricing in a victory for the Modi-led NDA in the ongoing general elections, albeit with a reduced majority. Given this backdrop, analysts say that long-term investors should stay put in the markets, but should brace for volatility.

“The market has high hopes about some of the structural issues being fixed by the new government post the ongoing general elections. However, the outcome of national elections may be less relevant from the perspective of next-generation reforms even though the election is very material from the perspective of the market,” wrote Sanjeev Prasad, executive director and co-head, Kotak Institutional Equities in a recent co-authored report with Sunita Baldawa and Anindya Bhowmik.

“The outcome of general elections (good or bad versus market expectations) may have limited bearing on state-level reforms. The Indian market seems reasonably confident about the BJP forming the next government, albeit with fewer number of seats,” he added.

Thus far in calendar year 2019 (CY19), markets have rallied over 8 per cent on the back of strong overseas flows.

The sharp run up has made Jayant Manglik, president – retail distribution at Religare Broking, cautious on the road ahead. “We reiterate our cautious view on markets and suggest focusing on trade management. Among the sectoral indices, pharma and information technology (IT) pack look strong, while metal and media counters may continue to underperform,” he says.

At the index level, experts do not rule out a swing of 2 – 3 per cent as the election outcome day nears. At the sectoral level, fast moving consumer goods (FMCG), capital goods and healthcare sectors, Jimeet Modi, founder and chief executive of SAMCO Securities & StockNote, says are mostly likely to trade sideways with very little volatility. On the other hand, realty, mid-cap, auto, metal, power and small-cap, he says, are in a corrective mode and a further downward pressure going ahead cannot be ruled out.

“Investors must not rush into the markets in this indecisive phase and go shopping, not at least till May 23 when the election results come out. A decisive breakout above 11,900 for the Nifty50 will signal resumption of an uptrend. However, in order to protect the long positions, one needs to keep a stop below 11,500 levels, which can take the market much lower if such lower support is broken,” Modi of SAMCO says.

	MARKET MAY-HEM
	Date	Sensex chg (%)	Nifty chg (%)
	May-08	-5.0	-5.7
	May-09	28.3	28.1
	May-10	-3.5	-3.6
	May-11	-3.3	-3.3
	May-12	-6.4	-6.2
	May-13	1.3	0.9
	May-14	8.0	8.0
	May-15	3.0	3.0
	May-16	4.15	3.95
	May-17	4.10	3.40
	May-18	0.46	-0.02
	Compiled by BS Research