From Ballots to Bull Markets: Navigating Market Volatility

PMS Bazaar recently organised a webinar titled “From Ballots to Bull Markets - Handling Volatility in Indian Financial Markets,” featuring Anil Rego, MD & CIO of Right Horizons. The session explored the intricate relationship between political events, particularly elections, and their impact on financial markets.

This blog captures the essence of Anil Rego’s insights, focusing on economic reforms, infrastructure spending, export growth, the "Modi basket" stocks, and strategic investment approaches.

Current Economic Landscape
Political Stability and Market Trends
Sectoral Insights
Maintaining Asset Allocation
Capital Preservation vs. Cash Allocation
Impact of Budgetary Policies and Investment Strategies
The Role of AI in Financial Decision-Making

Current Economic Landscape

Anil Rego commenced by discussing the significant reforms that have shaped the Indian economy over the past decade. Key reforms include the Insolvency and Bankruptcy Code, labour reforms, fiscal and tax reforms, and extensive digitisation. These changes have collectively strengthened India's financial system, improved labour markets, and streamlined taxation processes.

He highlighted the substantial government spending on infrastructure, which has been a crucial driver of economic growth. The collaborative CapEx growth involving the central government, state governments, and listed corporations has been a positive sign. Additionally, the Production Linked Incentives (PLI) scheme and the Real Estate Bill have bolstered manufacturing and real estate sectors respectively. The National Master Plan for roads, railways, and airports further stimulated infrastructure development.

Rego also pointed out the impressive growth in both merchandise and service exports, attributing this to the "China plus one" strategy, encouraging global companies to diversify their manufacturing bases. This export growth is expected to continue accelerating, contributing significantly to India's economic expansion.

Political Stability and Market Trends

Addressing concerns about potential political changes, Rego emphasised the importance of political stability for sustained economic growth. He reassured that historical data suggests voter turnout has been consistent with previous elections, indicating stable political engagement. He noted that while recent market corrections have caused anxiety, markets generally provide accurate indicators of economic direction. Despite short-term volatility, the long-term outlook remains positive.

Rego speculated on various scenarios regarding the upcoming elections and their potential impact on the markets. He predicted that if the BJP does not secure a majority, there could be increased volatility, with the NIFTY possibly falling by around 15%. However, he considered this a worst-case scenario and maintained that the NDA would likely secure at least a simple majority. Encouraging investors to consider investing before the election results are announced, he emphasised that any negative impact would likely be short-lived, with the overall economic trajectory remaining upward.

Sectoral Insights

Rego introduced the concept of a "Modi basket" comprising stocks significantly affected by election outcomes. These stocks, having seen substantial run-ups, are poised for larger corrections in case of unexpected political changes.

Despite short-term uncertainties, he remains optimistic about several sectors. Infrastructure, defence, PSU, manufacturing, capital goods, power, and banking are likely to perform well irrespective of political shifts. He also noted that foreign institutional investors (FIIs) could increase their current lower ownership post-election, leading to a market upswing. This, coupled with domestic institutional investments like SIPs and PFs, provides a stabilizing force amid electoral volatility.

Looking ahead, Rego highlighted India’s promising economic fundamentals, predicting significant growth in per capita income and subsequent increases in investments and consumption patterns. This positive outlook serves as a strong foundation for long-term investment strategies. He advised investors not to overreact to election-induced market movements, viewing corrections as opportunities to invest strategically and build robust portfolios.

Maintaining Asset Allocation

Rego emphasised the critical role of maintaining a balanced asset allocation strategy during volatile periods such as elections. Diversification across asset classes like equities, debt, and gold not only mitigates risk but also ensures portfolio stability over the long term. He advised against over-exposure to small-cap stocks during bullish phases, recommending prudent risk management and a disciplined approach.

Discussing the role of gold, Rego suggested allocating around 5% to gold as a form of portfolio insurance. Within the equity segment, he advocated for spreading investments across funds with a proven track record of long-term performance and disciplined risk management. He cautioned against holding excessive cash, highlighting the risks of waiting for market dips and missing potential market rallies.

Capital Preservation vs Cash Allocation

Addressing capital preservation strategies, Rego emphasised that merely holding large amounts of cash is not effective. He stressed the importance of maintaining fully deployed positions, advising against excessive cash holdings that could hinder portfolio growth. He recommended making proactive investment decisions before election outcomes are known to capitalise on potential market stability and growth opportunities.

Discussing potential election outcomes, Rego shared insights into sectoral preferences, highlighting infrastructure sectors like PSUs and railways, which could benefit from a government focused on development. He also emphasised the resilience of the consumer sector, driven by India’s robust consumer economy and favourable demographics.

Impact of Budgetary Policies and Investment Strategies

Anticipating the 2024-2025 budgetary impact, Rego suggested adopting a cautious approach due to potential policy changes. He expressed optimism for continued economic momentum provided there is policy continuity without major disruptions. He recommended a balanced approach between mid and large-cap stocks to safeguard investments against market downturns.

Rego emphasised disciplined and systematic investment strategies, advocating for phased investments and diversification to spread risk and achieve stable returns. His funds have consistently delivered significant alpha since their inception, with a focus on companies with strong earnings growth. He recommended the Flexi-Cap fund for stability, balancing investments across large, mid, and small-cap stocks.

The Role of AI in Financial Decision-Making

Discussing the impact of AI in financial services, Rego highlighted Alphabots, a product leveraging mature AI technology for informed financial decisions. This technology, developed by a company with extensive experience in AI, continuously evolves to enhance decision-making processes. Rego believes that as this technology matures, it will significantly disrupt and improve financial strategies.

Anil Rego’s webinar provided a comprehensive overview of handling volatility in Indian financial markets, emphasising the importance of political stability, strategic asset allocation, proactive investment strategies, and the role of AI in financial decision-making. For more detailed insights, you can watch the recording of the session.