Lok Sabha Elections 2024 trading strategy: ‘New investors should avoid trading on poll results day’

Edited excerpts:

Market has been on a high, will it remain the same ahead of election results or will there be a correction?

Markets work like discounting machines that often incorporate forward-looking events into current prices. They typically show a reversal only when unexpected surprises occur.

Events like election results are extremely volatile and it’s difficult to predict what outcome is already factored in on a day-to-day basis. Markets may move because of reasons other than elections, so we should not just wear an election result prediction lens to predict the market movement.

Read here: Lok Sabha Elections 2024 trading strategy: Investors are overestimating gains, says Diwakar Rana of Prudent Equity

Having said that, Nifty50 has already corrected around 2% from its all-time high achieved earlier this week. Now is it because market participants might be factoring in lesser seats for the incumbent government? It’s difficult to say, as there are global events also affecting this.

How should one trade on election results day?

If you are new to the markets, it’s best to avoid trading on high-volatility days like election result day. For long-term investors, such days are non-events in the grand scheme. Continue your systematic investment plans (SIPs) in stocks, WealthBaskets, and mutual funds, maintaining focus on long-term wealth creation rather than short-term market movements.

What will happen to Nifty valuation in case BJP doesn’t get a majority?

Factoring in a win by a certain party does play a role in the Nifty50 movement but for a very short time. Let’s try to understand this by looking at the history of the Nifty 50 movement on election results days.

Read here: Lok Sabha Elections 2024 trading strategy: What should your portfolio look like?

In 2004, the NDA government was the incumbent and was expected to form the government for another term. This was perhaps factored in. However, the UPA government came in the majority because of outside support by third front parties. The anticipation of change in ongoing policies led Nifty 50 to fall by 20% in 2 days. However, given the global world was already in a mega bull run, the market recovered quickly and returned 45% over the next 6 months.

In 2009, the UPA government got more seats than anticipated. This was a surprise on the positive front. It was a signal that policymaking would be clearer. Markets always like clarity. This led to around 18% rise in the index. However, this was also on the back of recovering from the Global Financial Crisis of 2008.

In 2014 and 2019, the market had started factoring in BJP forming a clear majority government and the market had started going up many months prior to the result day, hence the movement was not as great as in previous years. Moreover, in 2014, the world was coming out of a taper tantrum, where markets were consolidating for a very long time.

Read here: Lok Sabha Elections 2024 trading strategy: Is Nifty 50 set to scale new heights after poll results?

Coming specifically to the question now, it may seem markets are factoring in the incumbent government’s win as of today, but this expectation will keep changing every day, at least till exit polls on Saturday. Any result other than expectations, markets may see a movement, however, very soon, it will get back on the basis of fundamentals once the event is out of the picture.

Apart from this, what other factors can lead to a market crash?

The markets seem to be fundamentally strong and already factoring in great times ahead for the country and businesses. The Q4 result season has also been decent. However, any unexpected negative surprise on the macroeconomic front could lead to a market crash, besides the uncertainty surrounding elections.

These could include:

– The re-escalation of geopolitical tensions in Eastern Europe or the Middle East

– A shift from the Federal Reserve’s dovish stance. If interest rates do not fall as expected or if they rise

These events could shock investors and lead to turbulence.

Read here: Elections 2024: Diversify portfolios to mitigate risk, focus on defensives

Most experts had a Nifty target of 23,000 for post-result trends. Now that it has already achieved it, can it hit 24,000 that day?

As of 10 am on May 30, Nifty 50 is at 22,570, which is approximately 6.3% away from the 24,000 mark. While this is a modest difference and achievable, much depends on the exit polls and market reactions. If the exit polls suggest a BJP win by an even greater margin than expected, reaching 24,000 doesn’t look unachievable.

However, only on 2 trading days did Nifty 50 surge beyond 23,000, so that’s acting as a resistance as of now. The target should be to sustain above 23,000 levels before thinking about 24,000.

What should be the investor strategy for these 3 scenarios – outright BJP win, NDA win, no majority for NDA?

For long-term investors, the prediction of these precise outcomes should not matter and they should maintain their investment strategy and leverage the structural bull run India is experiencing. For those concerned about short-term volatility, hedging using derivatives can be an option to explore.

Read here: Lok Sabha Elections 2024 trading strategy: RIL, Zomato and more – CLSA lists 54 ‘Modi stocks’

Even though heavyweights have started rallying, midcaps/smallcaps remain outperformers. Do you see this changing anytime soon?

The last 1 year has been pretty good for mid and smallcaps, giving 55% and 61% returns, respectively. If we look at the ratios of Nifty Midcap 150 to Nifty 50, it’s at an all-time high of 0.85. The previous peak was at 0.70 in January 2018, after which there was a crash in midcaps. Similar is the case with smallcaps.

While this time we are seeing Nifty50 playing catch-up, if we tend to follow long-term mean reversion to play out, largecaps perhaps may outperform mid and smallcaps in the near future.

Do you prefer mid/smallcaps over largecaps in the current scenario?

Along with the above, given recent market developments, a cautiously optimistic approach is advisable. The cushion and comfort that largecaps offer is a huge plus point over mid/smallcaps who get beaten down badly anytime the market needs a reason to correct. While predicting market corrections is challenging, it is always advisable to prefer safer bets of largecaps to sail through these volatile events.

Read here: Elections 2024: Defence, power, industrials among sectoral picks ahead of result

What is happening with FPIs? Why are they selling? Will this trend change post election results if BJP wins?

April and May saw heavy FII (Foreign Institutional Investor) selling, totaling more than ₹35,000 crore worth of securities each month. In 2024 so far, FIIs have sold approximately ₹1,25,000 crore, marking the second-highest annual outflows in the past 15 years, only surpassed by in 2022. However, unlike 2022, where markets consolidated, 2024 has seen the markets continue to reach new all-time highs despite the selling by FIIs.

Strong selling by FIIs can be attributed to several factors:

– Profit-taking: The past year’s rally has left investors with significant gains, and selling ahead of sensitive times like elections is a prudent strategy.

– Emerging Market Shifts: China’s stock market has outperformed other emerging markets, making it temporarily more attractive.

Post-election, when the uncertainty diminishes, we could see a positive shift. The improved outlook in the short to medium term might draw FIIs back to the Indian market.

Read here: Nifty may hit 24,600 in a year: Jitendra Gohil of Kotak Alternate Asset Managers

One piece of advice for new investors?

New investors should start their investment journey with a focus on long-term wealth creation which would compound over time. The market may react strongly to short-term impacting events like Elections or Budgets. As we have seen, in the long run, the fundamental strength of the economy should matter more and this is where the new investors should put greater focus.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 31 May 2024, 07:17 PM IST