The benchmark indices have now lost near 5 per cent, from peak levels. In fact, much of the losses have been attributed to tariff wars between US and China - though that is partially true.
The last time tariff wars came to the fore, the Indian markets did not crack a great deal. This leaves us to a simple question: Are the markets predicting a hung election verdict?
Are investors factoring in a coalition government?
There could be some sense that many investors may have got. Exit polls for the first five phases have already been conducted, though it would be foolish to believe that some data could have been leaked. Internal surveys may have also been conducted and tweets and expert opinion may have been factored in, to believe that the NDA may be short of a majority.
All this is guessing, but, simple common sense tells us that the BJP had swept the Hindi heartland in 2014 and it is only likely to lose seats in these places. It may also be difficult to make-up this loss elsewhere.
Markets are overvalued
If one goes purely by fundamentals, one would realize that the Indian markets are overvalued. The Nifty is trading at near 20 times one year forward earnings, which is very expensive and nowhere close to the long term average of 17 times.
One can pay such a hefty premium for stocks, if the future growth of Nifty companies is in the range of 20 per cent for the next two years at least. However, there is no indication that earnings for these Nifty companies would average 20 per cent in the coming years.
Sitting on cash the best proposition
With markets overvalued and with election prospects not too encouraging for the NDA, it would be best to sit on cash. This would leave individuals with an opportunity to buy the market on every possible dip.
Much would also depend on inflows into mutual funds. For the last several months, mutual funds have supported the market, thanks to inflows through SIPs. Should there be a coalition government, we might see these inflows steadily drying. That could put pressure on the markets, should inflows from FPIs dwindle.
Stick to quality names
In case one is not sure of the direction of the market, it is best to stay invested in high quality names from the IT space. In fact, we would have even suggested FMCG names, but, there clearly seems to be a slowdown in this space as well. It therefore makes sense to stay in IT space, till the election storm subsides.
Also, look at companies that have reported a good set of numbers for the quarter ending March 31, 2019. Some good quality banking names that are seeing lower provisions and sharp recoveries in NPAs could be good bets. Here are a few small cap stocks that could be good bets for the long term.