How to Prepare Your Stocks for US Election Results

Nov 4, 2020

It was May 2016.

We were just months away from the US elections in November.

We concluded an internal discussion within the research team at Equitymaster. We discussed sectors, earning trends, management takeaways and macro challenges.

What stood out in our discussion was the direction of the overall profitability of Indian companies.

The numbers in front of us showed that profits of companies in India were well below their historical average. And that even a reversal to the mean could be rewarding.

What did that mean? Well, it meant that even a simple arithmetical average formula could bring in corporate profits that were 60% higher.

In other words, the Sensex could move from 25,000 then to almost 40,000 in few years.

This revelation had a huge impact on the way we picked stocks.

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The US elections in November 2016 had the potential for massive impact on global fund flows. But we knew the kind of stocks that could make the most of such money supply.

Sensex 40,000 became a reality in June 2019.

The US has gone to polls once again.

And like in 2016, the poll results can have a massive impact on India's fund inflows, foreign policies, and stock markets.

At least temporarily.

But eventually it's the earnings of Indian companies that would matter.

Here is something interesting...

The total profit of all profitable Indian companies put together was around Rs 4.3 trillion in 2016. The losses of the loss-making ones totaled 450 bn.

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So, India's net corporate earnings that year was around Rs 3.8 trillion.

In 2020, our total corporate profit is lower than Rs 3.8 trillion.

Not because the profits of profitable companies haven't grown. Rather they have grown by almost 40% since 2016.

But the losses of loss-making companies have grown 6 times or 500%.

That's simply because many more sectors like telecom, realty, power, commodities, hospitality, textile, infrastructure, and public sector banks have added to the pile of losses.

Sensex 40,000 is on the back of significantly higher profits of a handful of Indian companies.

So, the US election results may have a temporary impact on the valuations of such stocks.

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But eventually, it's the profitability of the larger group of companies in India that could determine the fortune of our stock markets.

And that, dear reader, will depend on how the strongest Rebirth of India megatrends play I explained in my video.

  • Whether India becomes a hub of global supply chain
  • Whether Indian vehicles take centerstage in global move towards clean energy
  • Whether India's fintech reforms create the next global financial centre
  • Whether India's niche tech companies become the next hub of innovation
  • Whether India's defence production and space research brings in cutting edge technology and capital

So, by all means take advantage of the market volatility over next few weeks and months to buy stocks that have been on your watchlist.

Book profits in businesses that have been a drain on your capital.

But know that the US election results will have only a limited impact on your stocks.

The Sensex could rise from 40,000 to 80,000 or even 100,000 during this period.

Nevertheless, the stocks that create wealth for you would be the ones that far outstrip the average earnings trend.

So, do not let the US election results change the way you invest.

Rather keep your eyes peeled for the big winners.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

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1 Responses to "How to Prepare Your Stocks for US Election Results"


Nov 4, 2020

Very sensible opinion.

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