Which stocks should you invest in this election season?

Analysts caution a non-BJP government is not an impossible scenario.
In case of a Modi-led coalition, they advise investors to focus on discretionary consumption, select private banks and financials, RIL, housing, and IT.

Illustration: Uttam Ghosh/Rediff.com

The outcome of Assembly elections in five states currently underway will, at best, test the popularity of the Bharatiya Janata Party (BJP)-led government at the Centre and its policies.

However, experts do not extrapolate the outcome to the general elections scheduled for May 2019.

This, they say, is on account of the fact that state elections will be fought on local issues rather than a broad-based national agenda.

"Historical analysis suggests that state election results should not be extrapolated for prediction of a general election.

"While it remains more likely that two out of these states will vote for the BJP in the general elections regardless of their state election outcome, the results should at least take the pulse of public opinion as to the extent to the nation still favours the ruling BJP," said Sonal Verma, managing director and chief India economist at Nomura in a recent report.

A common thread that runs through most experts is that the markets will remain volatile till the general election outcome is known.

Beyond that, the markets will focus on continuity in economic policy and other factors, both global and local, such as movement in the rupee, crude oil, key interest rates in India and abroad, and the quantum of mutual fund and foreign flows, among others.

“The key themes across political parties remain employment, lower expenses (through lower electricity costs), farm loan waivers (Madhya Pradesh and Chhattisgarh), and a host of social welfare schemes.

"Increasingly, markets are likely to attach more importance to the economic continuity than political continuity,” says Suhas Harinarayanan, managing director of JM Financial.

So, what should one's portfolio strategy be in this election season?

Analysts at CLSA caution a non-BJP government is not an impossible scenario.

In case of a Modi-led coalition, to which they attach a 50-55 per cent chance, they advise investors to focus on discretionary consumption, select private banks and financials, RIL, housing, and IT.

Ridham Desai, head (India research), and India equity strategist, Morgan Stanley, says the state polls may have limited bearing on general elections, albeit the market will respond to polarised results.

Gautam Chhaochharia, head of India research, UBS Securities, remains overweight on IT, private banks (retail liability franchise), and property sectors, while being underweight on cement, industrials/infrastructure, NBFCs, and small- & mid-cap segments.