How will the state poll outcome impact the market sentiment on Tuesday?

We firmly believe that the results of state elections, which would be declared on Tuesday (11th December), do not matter much for the stock markets. There may be a knee-jerk reaction in the markets depending upon the outcome, but it shouldn’t give any fear for the markets for two reasons. 

Firstly, the objectives of state elections are different from those of general elections. While state elections are generally influenced by anti-establishment waves and local political issues, the elections for the Lok Sabha are largely fought for all-India leadership. 

Secondly, both BJP and Congress parties are pursuing the capitalist path to growth historically. What matters to the stock market is continuity in economic reforms and stability of the government at the Centre. While BJP party has taken bold economic moves like GST, FDI in insurance sector, etc, the Congress party was in forefront in early 1990s in initiating major economic reforms. 

What would worry the market or bring in long bearish phase is any possible instability at the Centre in terms of any National Party being forced to depend on too many political parties (like earlier NDA regime, which was forced to depend on 28 political parties). Such a situation would bring in a lot of instability to the Central government and hence, the focus on economic initiatives would be diluted and the same would impact the markets. 

It is too early to predict any such instability at this stage. We could have remained more cautious and also advised the investors to stay away till the clarity emerges on Lok Sabha elections, but we are compelled to maintain buy calls on value stocks for two major reasons.

Only ten large cap stocks have participated in this around 5% rally in the Sensex in 2018 so far. If we exclude them, the remaining stocks have lost around Rs.20 lakh crore of markets caps. Nearly 1,000 stocks have lost over 50% of their market caps. 

A large number of value stocks trades attractively at single digit PEs or discount to adjusted book values or at 5% to 6% dividend yields. For more than 3/4th of the stocks, there is already deep bearish phase and valuations are appealing. Therefore, it is better to buy such attractive stocks for the medium to long term, rather than getting scared and staying away by the market cycles.

Market cycles come and go – but history proves that in the long-term, they always reward the investors. In case, any of the two national parties get near simple majority then it is quite possible that overnight the valuations may get shifted vertically. It has happened in the past. So our advice is stay invested in value stocks. Manage the risk by not borrowing money to invest in equities; don’t go for aggressive bets on F&O segment; spread existing wealth assets between equity and safe fixed income securities; and lastly, but most importantly, don’t invest in companies, which have governance issues or balance sheet crisis.