Top stocks and sectors to bet on ahead of general election outcome

The month of May has traditionally been a volatile period for Indian equities, especially in election years. In the last 10 years (since 2008), the benchmark indices, the S&P BSE Sensex and the Nifty50, have gained seven out of 10 times, with the outcome of the election acting as a key driver to the market movement.

In 2009, the markets had sky-rocketed 28 per cent after the United Progressive Alliance (UPA) emerged victorious on the back of an unanticipated rise in the Congress’ seat tally. They, however, plunged more than 16 per cent after the UPA came to power with the help of Left in 2004.

Similarly, in May 2014, the benchmark indices had risen 8 per cent, following Narendra Modi-led Bharatiya Janata Party‘s (BJP’s) landslide victory.

This time around, however, analysts say the markets are already factoring in a victory for Narendra Modi – led National Democratic Alliance (NDA), albeit with a reduced majority. That said, a negative surprise could see a knee-jerk reaction.

Global developments and corporate results back home are the two key factors that will keep the markets choppy till the election result is known. On May 6, the volatility index, India VIX, for instance, rallied 10 per cent intra-day midst poll uncertainty and accelerating global trade tensions.

“Markets have witnessed a meaningful pre-election rally in the month of March and early April. Since mid-April, we have witnessed a lack of aggression in the broader markets. Midcaps have witnessed meaningful correction while mixed activity is seen in the frontline space,” says Sahaj Agrawal, head of derivatives at Kotak Securities.

INVESTING STRATEGY

With only two more rounds out voting of a total of seven left (May 12 and May 19) before the election outcome is known on May 23, should you exit the markets or stay put?

Analysts say investors who have an appetite for risk and can digest volatility should stay invested. While the election outcome can trigger a knee-jerk reaction in the short-run, the medium-to-long term trajectory will be decided by corporate earnings and other global / local developments. For those seeking a safer option, hedging exposure or exiting the markets will be a prudent strategy.

“A prudent approach would be to hedge the existing market position or trim exposure to high beta sectors like non-banking financial companies (NBFCs) and others. A BJP-led government will be seen as a stable government that is likely to focus on capacity creation through infrastructure development. Cement companies and corporate banks like ICICI Bank, Axis Bank are good stocks to focus on,” says Naveen Kulkarni, head of research, Reliance Securities.

Analysts at Elara Capital recommend infra-based sectors, as they will remain in focus over the long run, irrespective of the election outcome.

“Our strong view would be to align to new growth focus areas for the new government such as housing, credit penetration, tourism, healthcare for all and watch out for the nascent recovery in the Investment cycle. A natural corollary to that will be to buy banks, real estate, cement, healthcare and the hospitality sector,” says Harendra Kumar, chief executive officer and managing director at Elara Capital.

Jay Anand Thakkar, assistant vice president for equity research, Anand Rathi, on the other hand, remains bullish on pharma, banking and information technology sectors.  

PSU and capital goods, according to Deepak Jasani, head of retail research at HDFC Securities, have done well historically during elections on hopes of better policy mechanism post government formation and can be considered for investment.

“The traditional performing sectors - banks and fast moving consumer goods (FMCG) – could also do well. However, given high valuations of the stocks in these two segments, one should be careful in increasing exposure to them now,” he cautions.