2019 elections may keep markets nervous, bet on short- and medium-term debt

The year 2019 promises to be an eventful year for investors. The general election year was set in motion by Prime Minister Narendra Modi through his widely telecast interview on the first day of the year. The political tussle, leading up to the general elections in May, is surely going to get intense and, at times, acerbic. Market observers and investment advisors believe the run-up to the elections and its results would have a huge bearing on how financial markets behave. In general, the investment community is averse to uncertainties. 

Election impact: “The biggest factor that will impact the Indian equity markets in 2019 is the general election, the results of which would come sometime in May. The markets are expected to be extremely volatile in the run-up to the elections,” says Rahul Agarwal, Director Wealth Discovery/EZ Wealth.

While Agarwal feels that the current view of the market is that the NDA may scrape through in the elections. However, a change in government could spook the markets. “At this point given the price action in the market, it appears that political uncertainty is not priced in and the markets are in broad agreement that the incumbent government would get a second term. However, if the results are contrary to the market consensus, we can see a major selloff in the equity markets, market participants like predictability and a stable policy framework and any disruption to the status quo, therefore, will lead to a market correction in the immediate short term after the results,” adds Agarwal.

S Sridharan, Head, Financial Planning, Wealth Ladder Investment Advisors agrees with Agarwal but says that the markets would soon focus on fundamentals after elections. “The coming election is the big event until May 2019. The market will always cheer if there is continuity in government. Otherwise, it may witness negativity. However, this will live for a short period. The corporate earning revivals could take the market to the next level,” he feels.

Other factors: While a major focus will be on the way the electoral battle moves, the market will also keenly watch other domestic and global developments. These would include the interest rate movement and the Reserve Bank of India’s stance on interest rates and the liquidity measures, how crude oil prices pan out, the rupee movement and inflation. Global geo-political environment, US-China trade war, and the US Fed’s stance on the interest rates are some other factors that certainly would have significant bearing on the Indian equity markets in 2019. “Historical data shows that there is heightened volatility in the months immediately preceding Lok Sabha elections. Given the existing global macro headwinds, that is, trade war escalation, slowing global growth, US recession concerns and lingering concerns over RBI autonomy, there could be enhanced volatility environment and that may have a negative bias towards market performance in the near term,” says Anil Rego, Founder and CEO, Right Horizons.

Bet on debt:  Debt could play a major role in stabilising portfolios in the coming months. Investors should consider significant exposure to fixed income securities for capital preservation, which could be debt mutual funds, banks fixed deposits or high-rated corporate debt instruments. “Investors should increase their allocation into debt securities up to 40 per cent of the portfolio for a moderate to low-risk profile. In the short term, interest rates are expected to go down though the long-term interest rate trajectory is unclear. It is therefore advisable to stay in short-term to medium-term debt instruments to minimise interest rate risk in a fixed income securities portfolio,” says Agarwal.

Rego also advises staying invested in the shorter end of the debt market. “Debt essentially plays the role of a cushion. In a growth-oriented portfolio, debt works as a shock absorber. In a portfolio biased towards income generation, debt plays the crucial role of delivering stable gains and also has to minimise capital loss. For short-term goals, it is always wise to keep the investments in safe investments like bank deposits, liquid or low-duration or arbitrage funds,” Rego says.

He advises existing debt investors to look at reducing their exposure to long duration bond funds and credit funds and that the focus should be on debt funds with shorter maturity profile and extremely good credit quality portfolio. “If you are investing in debt for stability, invest in debt funds that stick to government securities, treasury bills and top-rated PSUs only,” adds Rego.

  

Portfolio mix: A good investment portfolio should have a healthy mix of equity and debt keeping. The portfolio mix, however, should be based on the one’s risk appetite and market situation. Agarwal feels that given the likelihood of high market volatility, an ideal portfolio for 2019 should have a higher fixed income component and the equity exposure should also be largely allocated to select large-cap stocks, along with diversified mutual funds, some capital can, however, be assigned to select quality midcap stocks that have taken significant beating in 2018.

Strategies: In view of the likely heightened volatility, the primary focus of investors should be on risk minimisation and capital preservation, especially during the first half of the year. The most efficient way for investors to minimise portfolio risk in 2019 would be to invest systematically at regular intervals. “Systematic investments can be made through mutual fund SIPs. If an investor chooses to participate directly in the markets, he/she should buy select good quality stocks at regular intervals to improve the average cost of buying. Investors should also focus on diversification to mitigate the volatility in a specific sector,” Agarwal advises.

­­­However, while reworking one’s portfolio based on current events of likely future developments, one should always keep their financial goals and their risk-taking abilities in focus. Thus, the equity market is not the place to be if you are easily spooked by market volatility. In case you are uncertain, the best recourse is to take help of a qualified advisor. “A much easier job is to outsource such complicated decisions about asset exposure to asset allocation funds that have a formula based approach. Dynamic asset allocation is a job best left to experts,” Rego says.