By the time you read this, the election drama will be over, and we will know the shape of the new government. The stock market would also have settled down and adjusted expectations to the new government’s known priorities.
While every political party has ideological biases, there are certain things any party that comes to power must do, regardless of biases. We can be certain that the next government will put cash into the hands of lower income groups. It may do this through new schemes like NYAY, or by hiking benefits under MNREGA, or pushing Minimum Support Prices for food, or some other scheme. But it will happen as every political formation has campaigned on a populist platform.
Second, we can be sure that the next government will try to create jobs, and address farm distress, since these two issues have cropped up repeatedly. Whether they will succeed, is a different matter. But they will try.
Beyond joblessness and agricultural distress, there are other issues the new government must address. The economy has slowed down – even suspect official data, shows that. There is a big debt crisis, with banks and NBFCs struggling as borrowers default.
Government revenue generation is lower than estimated and expenditure have been higher, driving up the Fiscal Deficit and leaving little room to spend on new schemes. At the same time, growth across the world is also slowing down due to events like the US-China Trade war, Brexit and US-Iran disputes.
Under such circumstances, investors must assume that exports will not be a high-growth area, though this may change if the rupee depreciates sharply. Investors must further assume that there will be a lot of uncertainty about highly-indebted companies and the financial sector. The debt crisis is into its fourth year and nasty surprises are still emerging.
On the sunny side, we should see a little bit of a consumption boost as the new government tries to put money into people’s pockets and addresses farm distress and joblessness. That gives us a template to start looking for the sort of companies that could see high growth, while maintaining reasonable safety.
The investor should look for companies that are consumption-oriented and capable of funding expansions out of their profits without taking on debt. This assumes a focus on FMCGs, and on two-wheeler stocks, and isolated winners in other areas.
Identifying good companies may not be so difficult. But it will be important to seek reasonable valuations. Even a great business will not yield good returns, if it is bought when valuations are unrealistically high. This is a real problem in a strong bull market. There are very few, if any, profitable, low-debt companies trading at valuations that can be justified by growth prospects.
That brings us to the last point. We have a strong bull-market where valuations are at historical high levels. We have an economy that’s slowing down and poor corporate earnings in the last two quarters. That paradoxical situation is unlikely to last.
There is a very high probability that the stock market will correct downwards, before picking up. Be prepared for a bear market, and keep investing with a three year time frame. You should welcome a correction since it will allow you to pick stocks at lower averaged valuations and. As and when there is a correction, buckle down and invest more. This is easier to do, if you look for mutual funds that fit the twin criteria of possessing high exposure to consumption, and low exposure to high-debt companies.
If you are looking for alternatives to equity, rather than growth, here are a few things to consider. Debt funds will be very shaky until the debt crisis resolves. The rupee could fall if crude prices rise. Given global uncertainty, investors abroad may also be seeking safety.
Put it together and you could hedge with some alternative assets. Gold is likely to climb in value since it is seen as a safe haven. Investing abroad in index-based ETFs could gain due to the weak rupee, even if there is a global bear market. Both gold and overseas investments could therefore, make sense if you are hedging for a two-three year period.
The author tracks economic, behavioural and corporate tends, hoping to gauge good avenues of return