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The election results and your investments

The election results were good but many economic and business numbers are bad. What should investors do?

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So the mountain peak has been climbed and the green valley on its far side is now visible. I'm referring, obviously, to the elections. For months now, the Lok Sabha elections of May 2019 had loomed like a mountain in front of equity investors. They had no choice but to climb it but had little idea what lay beyond. It could have been a dark jungle with dangerous snakes lurking in every shadow, or it could have been a green and fertile valley, with a promise of growth and prosperity. Of course, by now, from the reaction of the equity markets, we all know very well what investors think lies before them.

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In the language of traders, what the Indian equity markets are seeing right now is a 'relief rally.' I'm always sceptical of the utility of such concepts but let's examine it for what it's worth. The idea is that markets are rising not because of the presence of good news but rather the absence of bad news. They're relieved that the situation has not turned out to be as bad as the worst they had feared. Equity traders were apprehensive of election results that would be adverse in a lot of different ways (no need to go into the entire list now) but are now feeling relief and are buying stocks at higher prices and so this is called a relief rally. So far, so good.

However, the headlines also tell us that the business and economic news is not good. The rate of GDP growth has dropped to 5.8 per cent over the January-March quarter, the lowest in five years. The news from sectors like automobiles is particularly alarming with bellwether Maruti's sales shrinking by a huge 22 per cent over a year ago, which is the worst such drop in seven years. In general, corporate numbers are in the doldrums and any strength in stock prices are making equities even more overpriced than they are. More broad-based indicators like direct tax collections are also suspect.

In general, it's the kind of time in which people are often advised not to invest, and to hold on to their cash and keep it in safe havens like banks and liquid funds. If you scan the investment media, there's no shortage of advice of this sort and all of it sounds balanced, sensible and cautious. It's also completely wrong.

If one steps back and takes a long view, then the conclusion could well be the opposite. One would say that this is a great time to invest. The reason is simple: the near-term outlook is not great but the long-term outlook is fabulous. Some of the reasons for the near-term being shaky are given above. However, the reasons for the long-term outlook being good is simply this government's track record on tackling fundamental economic and business issues over the last five years. It's a little bit like analysing a company and saying that the details matter less than the management.

For the individual investor, it's pretty obvious what path to take. Keep investing steadily, ideally through SIPs, ideally in a small set of equity mutual funds. Through good times and medium times and bad times, that's the route that'll give you the highest likelihood of meeting your financial goals.

This actually raises an interesting question: what would have been the right advice had the election results been very different? What if, heaven forbid, we were currently in a situation where ministries were being sold to highest bidders in a coalition government and power brokers were running amok in Delhi as they used to in the past? Most of us have heard those infamous phone recordings and so know very well what used to happen.

What would I have written here in that case? That's the really interesting part actually--the correct investment advice would still be exactly the same! As an individual investor, your investment plan would be pretty much useless if you had to predict future events and modify them accordingly. This has nothing specifically to do with these elections, or elections in general. It applies to all external events. Why that should be the case, and how you can ensure that you stay on course? That's a story for another day, soon.

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