Market assuming status quo on government; 10-15% correction possible if not: Long-short fund manager Rajesh Bhatia on election, portfolio positioning

Rajesh Bhatia is the Chief Investment Officer at ITI Mutual Fund

With three decades of experience in investing, and especially managing a long-short fund for a good part, Rajesh Bhatia knows how to straddle the short-term and long-term. The CIO of ITI Mutual Fund speaks to Moneycontrol exclusively on how to position ahead of the election.

Markets thrive on predictability. This government has driven a capital expenditure-led economic cycle, making its continuation very important for the markets. Hence, the election verdict is highly significant.

Currently, market sentiment is very positive, anticipating the same government to return to power, ensuring policy continuity.

The risk is significant in the short term, if this government does not come back to power. We could easily see a correction of 10-15%.

Right now, the mind of the market is positive. The base case for the market today however is a political status quo. But the mind of the market can change dramatically very quickly. That’s when disproportionate upside or downside takes place, post a phase of a complacent assumption which proves false.

In 2019, for instance, the market was assuming that Covid was not going to disproportionately impact the economy, but it got surprised in 2020. It reacted suddenly and stocks saw a disproportionate fall.

Stay invested.  But understand that given last year’s strong performance, there’s risk of correction. India remains a promising market globally. Focus on long-term potential while navigating short-term fluctuations.

I would say carry your positions, again, since this is a bull market and the probability of this government continuing is high. But buy deep out-of-the-money puts to hedge against an low probability event risk.

Yes, since this is a bull market and it will continue regardless of continuation of this government. But after a downward shift in valuation.

Two key risks to consider a) Geopolitical risk. There is a lot of tension between China and the western world on dumping of manufactured goods for one. Hope this does not translated in to some macro event b) Interest rate risk. This is crucial for equity valuations. Currently, the market isn't overly concerned about rising crude or interest rates, so the India story remains intact.

Since March 2023, sectors like real estate, automobiles, capital goods, banks, and non-banks have led the rally. Unlike the US, India's market shows breadth, indicating a strong, high-quality bull market. The investment-led cycle is in its early stages, typically lasting five to seven years. Even if we're in a late valuation cycle, earnings growth should cushion any valuation corrections and support stock prices.

If a BJP-led government wins with a strong majority, FIIs would have a very good reason to come back due to five-year predictability.

India may not completely diverge from global markets, but it is better positioned due to macroeconomic stability.