Should You Buy Equities Ahead Of General Elections 2014?

By Arjun Parthasarathy (Guest Writer)

Elections are approaching and those who missed the equity rally from lows of 16,500 to 21,000 on the Sensex over the last two years want to know if it is a good time to buy equities? It is a tricky question to answer as election is an event and can swing any way even if the majority believe that one party will come to power.

However the question must be answered and here is my answer on whether you should buy equities before the elections.
Listening to financial market participants, investors and mainstream media, a majority believe that the Modi led NDA will form the government at the centre. Majority also believe that the new government can work miracles and all the ills of the economy will be set right soon.

It is good to hope but it is dangerous to expect everything to become all right in one year of the new government taking power. India goes to the polls in April-May 2014 at a time when the economy is floundering. GDP growth for fiscal 2013-14 is expected at 4.9 percent against a growth rate of 4.5 percent seen in fiscal 2012-13. GDP growth is at decade lows and has come off from 8.4 percent levels seen in 2010-11. Inflation as measured by the CPI (Consumer Price Index) has averaged 9.5 percent over the last five years.

Many factors can go wrong for India even if a stable government is formed at the centre. Monsoons can fail hitting agricultural growth causing inflation, global economies can falter driving out risk appetite, government may not be able to control its borrowing driving up interest rates and banks may stop lending given rising bad loans.

Uncertainty is still very much out there. However at the same time there are factors that are looking positive. On the global front, US seems to be on a recovery path while Europe is looking to steady itself. Domestic IT companies are optimistic of their performance in the face of higher spending on outsourcing in US and Europe. Domestic pharmaceuticals companies are also showing strong results on the back of rising sales in the export markets.

Commodity prices are soft globally given that China's growth has slowed down to 7.5 percent to 8 percent levels from over 10 percent levels seen in the 2000-2010 period. Soft commodity prices including oil that is off 20 percent from peaks seen in 2008 is positive for manufacturers in India as raw material costs are kept down. US is looking to become an oil exporter in a couple of years time and that will keep oil prices down globally.

Global risk appetite is strong as seen in the sharp fall in yields of PIIGS countries, FIIs are net buyers of Indian Rupee bonds in January and February 2014 and the rupee itself is stable at levels of Rs 62 to the US dollar.

Given the positive factors and the uncertainty on the economy and elections, my opinion on whether you should buy equities going into the elections is yes, you should buy equities but be stock and sector specific and be prudent on weights of each stock in your portfolio.