Do elections influence your investing decisions? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do elections influence your investing decisions? 

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In this issue:
» Gold prices to drop in 2014
» Is Japan out of deflation?
» India should cut debt: Montek Singh Ahluwalia
» Bitcoin operators shut shop in India amidst RBI warning
» ...and more!

We are on the verge of 2014 general elections. Considering the mis-governance we have had in the last decade, next year's election could well be the most consequential one in India's history. Can the incumbent government retain power by dishing out populist policies despite being embroiled in corruption? Or will the chief opposition party be able to trounce it? Such questions are clouding investors' minds now.

Elections are a key event for stock markets. Hence, most investors are trying to read the outcome in advance. And large brokerages are showing them the carrot here by coming out with pre-election sector themes. These brokerages indulge in predicting the poll outcome and then list out sectors which are expected to do well based on that outcome.

We feel this is more of a guessing game rather than analysis. While India may be a bi-polar country, regional political parties have a big role to play in forming the government. Very rarely has a single party got a clear mandate. Thus, coalition politics is the nature of Indian democracy. This makes poll prediction a difficult task. As a result, predicting the course of markets based on poll results is akin to speculation. This is because coalition government is built on compromises. And this leaves enough room for populist measures which are not pro-growth.

Also, there has been enough anecdotal evidence which suggests that investors have been wrong in guessing the influence of political outcome on stock markets. Take the case of 2009 for instance. When the UPA government came to power, the markets gave thumbs up to this verdict believing in the reform story. But since then the performance of the UPA government is for everyone to see. The government is muddled in scams and controversies.

While one may say that markets did reach an all time in 2013, it was more to due to easy liquidity rather than a reformist approach. In short, the index peak had little to do with the performance of the government.

It is true that political outcome is a key event for stock markets. But there are other factors like global liquidity and valuations which are even more influential and can determine the fate of the market irrespective of political turmoil.

Trying to predict the poll outcome in 2014 is an attempt to know the unknown. Even if the investors are able to get their prediction right, it will not necessarily translate into higher returns. For one, the poll verdict could already be in the price. Secondly, even if it is not, there is no guarantee that a new government will do a better job than existing one which is the basic premise of buying now.

Hence, rather than indulging in such speculative exercise which is futile, investors should base their investing decisions on fundamental factors. Also, one way to eschew the impact of political outcome on investments is to look for stocks where government interference is minimal.

Companies which are not subject to regulations and can freely price their products fall in this category. However, investors should carefully assess the valuations before investing in such companies.

Do you base your investment decisions based on poll outcomes? Let us know your comments or post them on our Facebook page / Google+ page.

01:50  Chart of the day
2013 has been a dull year for Indian stock markets. The Sensex and the Nifty's year to date returns have been lower than the government bond yield. There were quite a few sectors namely infrastructure, engineering and real estate that suffered in 2013. Selective banking stocks also lost heavily during the year due to rising asset quality concerns.

Our today's chart shows top Nifty losers during 2013. Jaiprakash Associates tops the list here with losses of 44%. Rising debt and slowdown in cement demand led to a huge correction in stock price during the year. Next in the list was Jindal Steel & Power (JSPL) with losses of 41% after it got embroiled in the coal gate scam. JSPL was followed by IDFC and PNB. All in all, 2013 was a forgetful year for Indian stocks. Though the stock markets reached an all time high in 2013 it would not be wrong to say that it was due to excess liquidity rather than fundamental strength. The retail participation was also low during the year. Policy paralysis, red tapism and high interest rates are the factors that continue to weigh on investors mind. Also, with general elections due in next year most of them are adopting a wait and watch approach before committing fresh funds. Further, with Fed announcing its tapering program liquidity is not going to be easy to come by. Hence, it would be interesting to see how markets shape up for the next year.

The top losers amongst Nifty stocks in 2013
JSPL= Jindal Steel & Power, PNB= Punjab National Bank

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30%. That's how much the yellow metal gold is likely to drop in price by the time 2013 draws to a close. Not a performance to be proud of by any stretch of imagination. It is even worse off on a relative basis when its performance is compared to other asset classes like US equities or even Indian stocks for that matter. So, will the year 2014 bring with it any revival hopes for gold? It doesn't quite look like it unfortunately. For the odds are heavily stacked against the yellow metal. Its inflation hedge status is under threat as there are no inflation clouds looming on the horizon. On the contrary, the US tapering could further alleviate those fears. Even India and China, the traditional powerhouses of gold demand, aren't likely to keep up their buying frenzy. Life is further made difficult in India by the Government's strong resolve to bring current account deficit under control and thus curb gold imports . Having said that, this is not a bad time to stock up on gold for the long term. According to us, gold should be seen as insurance and not as an investment asset. And with world's problems far from being over, one never knows when the yellow metal's use as a store of value would need to be pressed into action.

We have highlighted time and again that developed economy central bankers are playing a dangerous game. Our most vocal criticism has been against the unprecedented money printing programs by the US and more recently Japan. Through near-zero interest rates and heavy liquidity pumping, the developed economy policymakers have waged a war on deflation. While India is struggling to bring inflation down, these economies are doing exactly the opposite. They are trying various ways to prop up inflation. Their rationale is a bit too simplistic. By pushing inflation up, they intend to inflate asset prices, spur investments and growth in the economy. What they fail to realise that their actions may have adverse unintended consequences. The economy is a very dynamic creature. The monetary experiment of these central bankers is not a controlled one.

But the financial markets don't seem to care about the long term effects of such reckless measures. They focus too much on short term data and react accordingly. Consider the case of Japan. As per an article in Business Insider, inflation (baring food and energy prices) in Japan stood at 0.6% in November 2013. This has been the best result in the last 15 years. The broader consumer price index also rose at the fastest pace in 5 years. While economic commentators are claiming this to be a victory of 'Abenomics', we're highly sceptical. Over the long term, this could very well be a recipe for disaster.

Bitcoins. Even as other asset classes, particularly gold, lost their luster in 2013, this nouveau asset class gained wide acceptance. At one point it even threatened the US dollar's reserve currency status. We wrote to you earlier this year, about the bitcoin mania being dangerously similar to tulip mania and dotcom bubble. The monetary base of Bitcoins crossed US$1 bn at the end of March 2013. This made it the most widely accepted alternative currency. The mini bank run in Cyprus made the digital currency even more endearing. So much so that experts were debating whether Bitcoins can be an alternative to fiat currencies and gold.

However, the central banks world over, except the US Federal Reserve, have not been very enthusiastic about the usage of bitcoins. China recently banned the usage of bitcoins in the economy. Our conservative central bank, RBI, has been quick to react too. The RBI has issued a formal warning against use of virtual currencies such as bitcoins. This is particularly due to potential money laundering and cyber security risks. The clampdown by central banks has also led to speculative market for investments in bitcoins come crashing. And we hope that this experience has changed the opinion of those doubting the scope of gold as a safe haven asset.

India's fiscal deficit has considerably bloated and it is obvious that the government should focus on bringing this down. Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia is of the view that the focus should be on reducing debt over the next 5-6 years. This should be through a prudent fiscal policy. However, he emphasized that changes should not be too draconian and that there should be a proper balance between toning down debt and fuelling GDP growth. Mr Ahluwalia may be correct, but it will be interesting to see how the government chooses to do this. The obvious answer is reforms. And if the new government is able to effectively implement the same, then there is no reason why growth should not take place. And that in itself would ease the pressure on government finances.

In the meanwhile Indian stock markets have extended their rally. At the time of writing, the benchmark BSE Sensex was up by 143 points (0.68%). All the sectoral indices barring Oil and Gas were trading in the green. IT and Realty stocks were leading the rally. All Asian stock markets were trading higher led by China and Hong Kong. The European markets opened on a positive note.

04:50  Today's investing mantra
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact" - Warren Buffett
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3 Responses to "Do elections influence your investing decisions?"

Raghuveer Singh Rathore

Dec 28, 2013

Your "Companies which are not subject to regulations and can freely price their products fall in this category. However, investors should carefully assess the valuations before investing in such companies." seems quite convincing and I feel, under the prevailing scenario when all speculations & predictions are ambiguous, at least retail investors must strictly adhere to what you have suggested. This strategy may fetch snow ball to the investors with no hustles.



Dec 27, 2013

You are right about disregarding elections when considering stock transactions, but how is gold going to lose 30% ? From what base? It started the year at 30,620 per 10 gram and today was 28553/10gms. That's a fall of just under 7%. do you expect it to fall another 23% in the remaining 4 days of the year?


virendra bapna

Dec 27, 2013

all retailer investors(till today they have only lost money forget break even)as they believed in fundamentals,growth etc etc....... but the real story of making money in stock market is insider trading,insider news,and investing in momentum and then after cornering major chunk in target company by making syndicate and then bribing news channels,print-tv media and finally trapping retail investors to make them retail poor investor.

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