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There’s a famous saying – “In markets the inevitable never happens. It’s the unexpected always”
31 Lac Cr of Investor wealth got wiped out in one market session on the day of election results. Key benchmark indices lost between 5-7% and there was utter mayhem in few of the favoured sectors like PSUs, Railways, Power, Defence and Infra. Any trader who was positioned in the market and looking for a big bounce up, chances are that they are badly bruised. Such is the nature of markets! They can be rewarding in long run and brutal in short run. Trend is your friend, until the end where it bends !!
Burden of expectations could be brutally damaging and many across the country got a first-hand feel of it yesterday. From politicians to political aficionados to voters to investors – all alike! No one in their wildest of imaginations, expected the political verdict which came through yesterday. Even though the mandate is for BJP led NDA government, even though the mandate gives a clear distinction between the winner and runner-up – the markets aren’t enthused. Directionally the verdict is clear, it’s the magnitude which is fractured.
Magnitude sometimes make a lot of difference and that’s our take on markets going forward in one-word. Directionally markets will follow the mandate, magnitude might get disrupted a bit. To elaborate, we don’t think so for an Economy growing at 8.2%, markets are going to take a pause. Yes, the scorching pace will be checked now and perhaps investors will have to wait for sometime till dust settles and the new government starts functioning.
Second, biggest outcome of the verdict is that a single party might not be able to call all the shots and multiple other stakeholders will have to be taken along. Again in market parlance, those few sectors which saw a secular bull-run might well see a breather. Markets will have to be more broad-based and more inclusive for some time now. Slow moving sectors like FMCG, Pharma, IT might just come into play after a long lull. Not that the previous favourites are dead and dusted. They were stretching on extreme valuations and markets will now wait for them to be a little reasonable on valuations before again lapping on to the old horses.
There are many questions which will get answered in coming couple of months, and markets might just adjust sideways to get answer to those questions:
- Who will get the key ministries in the new govt. Specially Finance, Home, Defence, Railways etc.
- What will the budget of new government look like. This comes out in July.
- How much will the government need to compromise on key economic issues
- Finally, how will government position itself for key assembly elections coming up in next few months viz Haryana, Maharashtra, J&K and Delhi.
All of this and much more will only get answered few months down the line. It could be a patient, dull drag for sometime till all this unravel in full flavour.
Now the ultimate question, what should investors do?
To make my point, I would draw one analogy from a cult movie which came in 1986 – “Top Gun”.
The plot sees elite US Navy fighter pilots compete to be top of their class at the Naval Fighter Weapons School, also known as ‘Top Gun’. The two best pilots in the class are Maverick, played by Tom Cruise, and Iceman, played by Val Kilmer. Each pilot has a dramatically different style of flying and attitude toward competing. Indeed, the nature of these contrasting philosophies constitutes a major subtext within the movie.
Iceman is patient, methodical and makes no mistakes. He wears his opponents down until they themselves make a mistake, at which point he strikes and defeats them. On the other hand, Maverick relies much more on improvisation, risk-taking and his raw skill as a pilot. He constantly makes mistakes but an ability to score big wins ensures that he remains competitive.
The movie leaves little doubt that Maverick is the more skilful of the two pilots yet when it comes to competing, Iceman is demonstrably more effective and eventually goes on to win the Top Gun competition. Of course, anyone who has seen the movie knows that there were many twists and turns in the saga.
The point of this example is not to say that high-risk strategies have no place in markets, or are inherently worse than more conservative, ‘composed’ strategies. But over a long enough time period, the law of averages dictates that the latter will almost always outperform the former.
Thus, if you can remain composed in your decision-making for long enough and, even better, make significant moves when the chips are down, you’ll give yourself a significant advantage. Such discipline can be crucial as we enter the next phase of this market.
All those trying to play short-term trading games, making quick bucks and flipping through those few favoured names have been reasonably calmed by the brute market force. All those, who were focused on building long-term game will see this as an opportunity to build portfolios and allocations for the next big move.
I call this a dull, drab, drag market and only the patient ones with temperament will sail through this phase without losing focus and intensity. Limited point is, its fun to be Maverick in markets but in long-term Iceman wins. For short burst, being Maverick was rewarding. But over a long-period, being Iceman will always keep you ahead in the game.
To be an Iceman in this elite ‘Top Gun’ race of markets – one has to be focussed on consistent accumulation. Rather, increase the pace of accumulation when chips are down and wait patiently to strike big when the next opportunity arrives. If you were allocating 10 Rs every month, now is the time to make it 20 or 25. Don’t go all in yet, increase the pace and intensity of your allocation. Make it count when the opportunity knocks.
Investors have to answer a few key questions i.e. From a market perspectice if same Govt is back in power then what agendas will continue and what might get pushed back? Answer is simple, focus on building infra, railways etc, focus on defence and Make in India, focus on green inititatives etc will all likely continue. Govenment continues and so will governance in same fashion. Its not a big disruption, its a spammer for sure which will be sprinkled with some dose of popularism now. For investors, its essential to keep the process going and keep building on. Market cycles have a funny way of reversing or returning back. We repeat, direction remains – magnitude might change.
In markets one has to keep building dams and hope that river will flow through it. More often than not, it does flow. Be an Iceman and play the long game. Mavericks have learnt their lesson.
