“Choice-proof” sectors where you can invest in market volatility

Election results have a huge impact on stock price movements. Results, if they are not in line with investors’ expectations, often lead to market volatility, which further gets on investors’ nerves.

As of 5 p.m., June 4, 2024, the BJP-led NDA is leading with around 294 seats, while the INDIA bloc’s lead has crossed 232 seats, defying all exit poll predictions, as counting of 543 seats is underway.

Despite a high on exit poll day and a sharp rally on election results day, many investors may not be comfortable with the cut-to-cut risks of stock trading.

Also read: Bloodbath in stock markets: Cool company Sensex suffers huge loss; Here are tips for investors

“Investing during uncertain times like elections can be very risky,” says CA Isha Jaiswal.

In this case, what investments are “choice-proof” that can make you money despite E-day market turmoil?

Says Ravi Jain, co-founder and managing director of Blostem, a financial services platform: “Every investor must have the right asset allocation to generate long-term sustainable returns and stability in uncertain political scenarios. To achieve this, you need to have a combination of a long-term equity portfolio and a smart fixed deposit portfolio.”

So what are the investment options that are less affected by political uncertainty or election cycles?

According to Aditya Goela, CFA, co-founder of the Goela School of Finance: “Defensive stocks are less sensitive to economic cycles. These would be well-established, financially stable and long-established companies such as Hindustan Unilever (HUL), ITC, HDFC Bank, Kotak Bank, ICICI Bank and Axis Bank.”

Here are some “election proof” investments that can help protect your money.

Diversified investment funds: There is an inverse relationship between the stock market and bond yields. Because these funds invest in a mix of stocks, bonds and other securities, they help spread risk across different assets.

Bonds: Government bonds and high-quality corporate bonds are generally less susceptible to short-term market volatility.

Blue chip stocks: Companies with a long history of stable profits and dividends will be less affected by political changes. These stocks may crash in the short term, but will ultimately deliver consistent returns.

Real estate investment funds (REITs): REITs that invest in stable, income-generating properties can provide a steady stream of income.

DIVERSIFICATION

Incidentally, diversifying across asset classes can also help create a portfolio that is resilient to political changes, including election results.

Says Goela: “It is important to remain diversified and pursue long-term goals. Asset allocation should be 70% equity and 30% fixed income, but investors should build a resilient portfolio regardless of political changes.”

When bond yields rise, stock market returns tend to fall and vice versa.

Jaiswal adds, “This is because higher bond yields make investing in stocks less attractive as investors can get higher yields from bonds. Conversely, when bond yields fall, stock prices tend to rise as investors seek higher returns from stocks. By spreading their investments across stocks, bonds, real estate and other assets, investors can reduce the impact of any single event on their portfolio.

SPECIFIC SECTORS

Sectors that are less affected by political uncertainty or election cycles include consumer staples, utilities, healthcare, IT and defensive stocks.

Says Goela, “Essentials companies such as Hindustan Unilever, Avenue Supermarts, Dabur Ltd, Tata Consultancy Services, Sun Pharma and Cipla Ltd provide essential goods and services, ensuring constant demand. The healthcare sector, including pharmaceutical companies such as Hindustan Unilever, Sun Pharma and Cipla Ltd, is relatively insulated from business cycles.

HISTORICAL TRENDS

Election-driven market trends tend to move as quickly as the vote surge on results day. Historically, the Indian stock market has experienced a pre-election rally followed by post-election volatility that had long-term effects.

“In 2004, on election day, Nifty fell by around 12 per cent, but the next day it rebounded by 8.3 per cent. In the next five days after the election results, the index increased by almost 16%. This proves that volatility is short-term in nature and in the long run, investors should leverage these opportunities to buy on dips,” says Jaiswal.

“In the 2014 general elections, the BSE Sensex witnessed a significant increase in the three months preceding the announcement of the election results, but saw a sharp decline after the results were announced,” Goela added.

HOW TO REVIEW SUCH PERIODS?

According to Goela, diversification is the key.

“To navigate these periods, investors can maintain a diversified portfolio to minimize exposure to any given sector or stock, focus on company fundamentals, take a long-term view and identify sectors less susceptible to election-related volatility, such as consumer staples, healthcare and IT,” Goela says.

As India enters a goldilocks economy scenario, some of the sectors that are likely to do well include energy, renewables, manufacturing, defense, railways and fintech, among others. Typically, the Indian economy grows at a good pace, regardless of the political outcome.

“However, a stable and strong government helps accelerate economic growth, as was seen in 2004-09 and 2014-24. Any short-term panic is usually an opportunity for the market, as was seen in 2004.” – adds Jain.