How To Invest After The Elections

The elections are over and the stock markets have started to move up. Is this a good time to invest in the stock market? Should you stick to your Mutual Fund investments? Is there a right time to invest? Here are the answers that you are looking for.

What affects the stock market

As a stock investor, you must know that a stock’s demand-supply dynamics and subsequently its price, is greatly impacted by any news. The election is one such news. However, the swing in the markets because of news is only for the short-term. In the long term, your stock investments will depend on the company in which you invested and your Mutual Fund investments are as good as the manager that runs the fund. So first, understand what news affects the stock markets and then whether you should react to this news.

News types

News can be any kind of news such as company-specific news, economic news or global market news. Apart from news that has broken out, markets also react to the news that is yet to come in. In fact, markets react more rapidly to rumours and anticipated events.

Our stock markets have the tendency to discount events much before they happen. It is quite easy to pinpoint certain critical company-specific news that affects a stock. However, there are several news items that come up frequently that might affect the market. And then there are certain news items that affect a particular sector and subsequently the stock in that sector. So, here’s a look at the news that will affect the stock market and certain specific sectors.

Additional Reading: Impact Of Elections On Your Equity Investments

Numbers

There are several Indian as well as international economic data that are released every week, month or quarter. These include Indian inflation figures, Index of Industrial production (IIP), Gross Domestic Product (GDP) estimates, and manufacturing data, among others. Markets react within minutes to the news on these numbers being released. Not only national, but international news also has an impact on Indian markets. Take May 6th, 2019 for example. On this day Indian markets crashed by 363 points on the possible hike of tariffs for Chinese goods. US President Donald Trump threatened to hike tariffs on USD 200 billion worth of Chinese goods. This led to a stock crash in certain sectors like consumer durables.

FII inflows

This is a very crucial factor that has a major influence on market sentiments. Foreign Institutional Investors (FII) come into the Indian markets for many reasons including the fact that interest rates here are higher than anywhere abroad and emerging equity markets have the potential of giving higher returns than those in developed nations. FIIs with a huge amount of investible surplus have the ability to turn around market sentiments when they deploy money in the Indian market. Take, for instance, the month of December 2018. FIIs were net sellers throughout the month and according to the Securities Exchange Board of India (SEBI) data, their net sales in the equity markets during the month totalled Rs. 1,103 crores. With FIIs turning sellers, the Sensex gained just about 0.3% during the month.

Interest rate changes

The interest rates in the country determine the number of major economic factors including deposit rates, loan rates, demand, consumption, and industrial growth, among others. For instance, on April 4, 2019, Nifty fell by 0.18% to 11,622 after a rally. Why? Because Reserve Bank of India (RBI) cut interest rates by 25 basis points.  The market has already factored in this cut in the repo rate (this is the rate RBI lends to banks in the country). Any major change in interest rates (or no change!) affects not only the market but also ‘rate sensitive’ sectors. These include banks (which provide loans), auto (which depend on consumers who avail auto loans) and real estate (which depend on people who avail housing loans).

Monsoon

This is a major factor in India as ours is supposed to be an agrarian economy. India is largely dependent on the monsoon every year for staples such as rice and wheat. So, any kind of news on the monsoon has a great impact on the market. What are the sectors that monsoon has an impact on? These include the agriculture sector, chemical and pesticides industry and also tyre and tractor industries.

Additional Reading: Pros And Cons Of Investing In The Indian Stock Market

Currency movements

Depreciation or appreciation of the Indian rupee always has an impact on the market. Rupee movements also have an impact on certain sectors that import or export goods or deal with foreign clients.

National/International events

Budget, policy reforms, elections, you name any political, economic or national/international event; they have an impact on the stock market. For instance, Sensex fell by a huge 600 points in June 2016 when the Brexit vote result was announced in Britain. This was the biggest fall for the index in over 4 months. An estimated Rs. 1.8 lakh crore investor wealth was wiped out. Just like special events, interest rate changes and other policy decisions by foreign central banks also have an impact on Indian stock markets. Some other events that affect our equity market include terror attacks, oil production talks and change in international government policies.

Stocks in an index

You know that an index consists of many stocks and some stocks have a higher weight in the index as opposed to others. And the equity markets are represented by the major indices of the country, which are the Sensex and the Nifty. So, when there is significant movement in stocks having a major weight in an index, it will have an impact on the markets.

Sector movers

Here is a list of common news items that affect specific sector stocks. You can keep this list handy to understand how stock prices change when a piece of news breaks out.

Additional Reading: Your First Steps To Investing In The Stock Market

Apart from all these factors, it would be prudent for investors to note the following significant points.

• Even though it is good to understand how news affects stocks, investors should not take any decisions based on the news unless it is company specific. Always look at individual companies and their long-term earning potential. Understand those good companies with excellent management teams will not be overly affected by economic cycles in the long-run. So, if you are a long-term investor, be on the lookout for crucial stock specific news.
• The most important point is that markets always factor in the good news. This means that when the event actually happens, the markets might fall.
• Unanticipated positive news might not have as much impact on the market as unanticipated negative news. The latter influences the markets pretty quickly.
• Another point to note is that any good news at the national level can be overshadowed by international bad news. Brexit is a good example. However, national-level news that is bad, will loom large on the equity markets even if there is good news from abroad.

Always take stock decisions based on prospects of individual companies rather than looking at economic news or rumours. When you hear company-specific news, confirm the same from the company to ensure that the news is true or false. If you are not sure about how to invest in stocks, then go for Mutual Funds. These funds invest in stocks on your behalf and have known to give better returns than traditional investments like Fixed Deposits, in the long-run.