Here's a two-pronged approach to navigate an ever-rising stock market

If anything, this regime has deservedly earned the reputation for some of the most progressive like the Insolvency Code, Direct Benefit Transfer, Monetary Committee, GST and tax reforms etc. The credit for India’s macro-stability and fiscal success goes directly to these reforms.

At the same time, the credit for one of the most regressive budgets presented in 2019 also goes to this regime. Fresh from winning the second term with a better tally than its first term, the then new finance minister ventured into one of the most regressive super-rich surcharge in the full presented then. Expectedly, it triggered a self-manufactured all-round pessimism across the markets which lasted nearly a year. Of course, the damage was hugely contained by rolling back those regressive measures, though belatedly.

Given this experience, one can’t be sure of the policy continuity, especially when one ponders on what kind of changes this regime will resort to as a response to the not-so-positive outcome from the recently concluded general election.

Before delving deeper into the potential risks of regressive policies post-election, it is important to understand the setting in the lead-up to the election.

While it is a great relief that we are now well past the political (election) and summer heat, who were anticipating a significant market pullback due to a negative election outcome have not been so fortunate.

As per experts, any scenario in which the ruling regime significantly fell behind the half-way mark would have been a death knell for the ongoing bull market. Market experts were predicting that if the worst-case scenario were to manifest, it would rattle the bulls, triggering a major pullback.

But here we are with the worst-case scenario from the election verdict. Contrary to expectations, markets have defied experts and are creating new records by hitting new highs day after day.

What are we missing? Will the markets correct at all? What can trigger a market ?

To find out, let us first look at some of the key factors that usually bring markets down and will any of them play out now?

The top factors that play folly to the markets are usually FII pullout, macro accident, regressive policies etc., not necessarily in the order of significance.

While the first two are not significant risks at this stage — given the extraordinarily huge FII interest in our markets on India’s growing macro stature — the third one is more nuanced given the push and pulls of coalition politics. Though the consensus view (hence the market’s sanguine outlook) is that there is tremendous optimism on progressive policy environment from the ruling regime, one can’t be very sure here, especially when one looks at the 2019 experience when the FM resorted to regressive tax policies in terms of a super-rich surcharge in the full budget that was presented immediately after the 2019 election. While the current ruling regime has shown a tendency towards progressive policies, the memory of the 2019 super-rich surcharge remains fresh. Although the FM has since demonstrated a commitment to more progressive measures, policy changes in response to an unfavourable election outcome remain a potential risk.

For some reason, if the regime manages to navigate the coalition compulsions successfully without the need for regressive policies, then one may need to wait much longer for new risks (unknown at this stage) to emerge that would lead to the market’s eventual pull back.

Given the foregone analysis, it appears that the primary known risks are unlikely to cause a significant market correction in the near term. In such a scenario, investors are advised to adopt a phased approach to portfolio construction, utilising market wobbles or consolidations to their advantage instead of waiting eternally for a major market pullback.

For example, the BSE Small Cap Index experienced a near 8% correction from its high in mid-February to a low in June, with individual stocks witnessing even bigger corrections of 20-25%. Markets may experience a similar wobble in the coming weeks in the event of increased F&O surveillance measures from SEBI or in case of any tax tweaks in the budget for options trading by classifying them as speculative income. Such opportunities, if they arise, will provide entry points for prudent investors.

In view of this, investors are advised to look at the following two-pronged approach to navigate this ever-rising market:

• Phased Investments: Instead of waiting for a substantial market correction, investors should make phased stock-specific bottom-up investments using the wobble or cool-off that comes once in a while instead of attempting to time the bottom.
• Monitor Policy Developments: Keep a close watch on any policy changes, especially around budget announcements.

By adopting these strategies, investors can effectively deal with this market that is exhibiting all-round resilience and optimism despite potential risks.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)