Analyzing the Aftermath of the Elections in the Stock Market

Hello everyone! This week we dissected what the stock market might look like following the close of the elections. Let it be clear, this isn't about making predictions, it's about understanding and interpreting data-driven patterns.

TL;DR

1. Historically, the Indian stock market often rallies in the long-term, post-elections.
2. The current stock market valuation appears neither undervalued nor overvalued.
3. Careful investment is needed; overinvestment is not advisable due to the potential volatility derived from the US market.

Now, let's unpack these points.

The Stock Market Post-Elections

As historical data indicates, the stock market typically experiences an upswing following the elections. The market's performance after election results heavily depends on those results. If what's expected matches the reality, like BJP coming into power in 2014, the market could soar by as much as 15%.

But things could also be volatile. For example, in 2004, the expectation was a BJP win, but instead, Congress came into power, causing an unexpected 9% correction. But, on a one-year forward basis, the market did recover, even soaring by 17%.

Key Takeaways:

• A change of guard at the national level prompts the market to rise by an aggregate of 27% on a 6-months forward basis post-elections.
• The sentiment currently indicates that it would be beneficial to stay invested in the market.

Market Valuation: To Invest or Not to Invest

The Nifty Price to Earnings (PE) ratio indicates neither an overvaluation nor undervaluation, as the ratios have been consolidating for the past 2.5 years. However, it's imperative to analyze this data in context with the US market, given the high correlation between the two.

For instance, during the USA's 2008 crisis, though it originated in the US, it also significantly impacted India. If there's a correction in the current overvalued US market, we might see a mirrored impact on India's IT stocks, showcasing potential volatility.

The potential correction does not necessarily advocate exiting the markets, but it makes bulk buying right now less attractive. As investors, we need to be very asset-specific and refrain from buying in bulk if good options at reasonable prices are unavailable.

Eyeing Business Models, Not Just Prices

Turning to specific businesses, it's wiser to invest in entities with proven, profitable business models. Companies hoping wrap up successful pivots after years of operation (and sizeable capital burn rates) present a risky gamble. The likes of Oyo, for instance, although it's trying to refile its Initial Public Offering (IPO), it's still not profitable after approximately a decade in operation.

The bottom line is that as participants in the public market, one has to be selective and conscientious of where they put their money. The rule of thumb is to focus on the underlying business models and not just on the public listing prices.

Wrapping Up

Navigating the stock market post-elections can seem like a daunting task. It's a transitional period marked by expected and unexpected shifts. However, by staying current on market valuations and understanding the global influences, particularly from the US market, you can have a clear, informed strategy to sustain the volatility and thrive in the long run. An investment in knowledge always delivers the best returns!