As we head towards 2024, attention around the general elections is getting visible with various election pundits talking about possible outcomes of the election.
Fundamentally, Indian markets seem to be well placed—decent growth, strong FPI and FII flows supported by DII investors and stable macros.
As a prudent investor, it is of prime importance to track macroeconomic and political landscape in the economy and align portfolio strategies to optimise one’s returns. While we concur that the elections are the principal determinant of the political ecosystem and hence the policies and reforms need to be closely monitored, we have observed that price performance in markets due to elections is affected only in the short-term.
Historically we have observed that while markets tend to be volatile in periods closer to elections, average volatility drops when longer term periods post-election are considered. From a returns perspective as well, the 3-year CAGR returns from election result day have majorly been in double digits.
While uncertainty around elections can impact market sentiment for short term, critical economic policies present tactical opportunities for investors.
Investment opportunities near election
Given the government’s push on infrastructure improvement, we are bullish on the sector as we think there will be an advancement of infrastructure spends which is likely to favor the infrastructure, cement, metals and capital goods space. Further, softening of interest rates is likely to bring down the cost of capital. Thus, as part of tactical allocation, we recommend exposure to Infrastructure sector. Banking sector is the backbone of any economy and it has a direct bearing with financial and economic development. We recommend considering banking as a thematic allocation due to improving asset quality and governments focus on infrastructure. Besides, to tide over volatility, one can invest in multiasset funds. Funds which take advantage of volatility and take exposure to multi assets have potential to generate alpha through tactical calls and lower risk via diversification as historically the difference between best and worst performing asset class in every calendar year is substantial.
Levers to generate alpha
Over the long-term however, key to portfolio construction is disciplined investing with a well-defined investment policy statement. The Warren Buffet’s saying, “Stop trying to predict the direction of stock market, the economy and elections” highlights the importance of a well-disciplined approach to investing.
We believe there are three key levers to generate Alpha in one’s portfolio.
Asset Allocation: It has been widely debated that Asset Allocation has more than 90% contribution in alpha generation. While the exact percentage can’t be quantified, selecting the right asset allocation is imperative, given the fact that no one asset class has outperformed others consistently over the last decade.
Even a small allocation changes within a portfolio can have the potential to generate alpha. For example, in 2016, adding a 20 per cent allocation to debt in a 100 per cent equity portfolio would have resulted in an alpha of 1.6 per cent at the overall portfolio level. Similarly, in 2019, adding 10 per cent allocation to global funds in a 100 per cent equity portfolio would have given an absolute alpha of 1.5 per cent at overall portfolio level
Market Cap Allocation: Different Market Cap perform in different market cycles, right mix of market cap allocation considering the macro environment can lead to Alpha generation in the portfolio. In years like 2021, by just adding 10 per cent allocation to mid & small cap in a 100 per cnet large cap portfolio, an investor could add an absolute alpha of 3.5 per cent.
Fund Manager Selection: Active portfolio management through exposure to fund managers with different styles/strategy based on outlook of the market and passive allocation in domains which have information symmetry to optimize cost can optimize portfolio returns.
Constructing a portfolio balancing these three levers is imperative to generate Alpha in portfolio.
(The author is Head of ICICI Securities’ Private Wealth Management business).