When the current Government came to power in 2014, there were several expert reports talking about a revival in the manufacturing and infrastructure linked sectors. The hope was that Government policy action in these sectors would add to earnings. With the next round of general elections around the corner, is there any merit in once again betting on certain segments of the economy benefitting from specific election outcomes?
Brokerages have compiled reports with 3-4 scenarios of probable Government formation and listed portfolio strategies with positive and negative sector outlooks for each of these scenarios. A similar exercise had manifested itself 5 years ago as well.
A quick look at the returns of BSE’s sectoral and thematic indices shows that the sectors which have done well in the period between 2014 and now do not include sectors like capital goods, manufacturing, infrastructure, realty, power, and PSUs where most of the policy action has happened. In fact, these are some of the worst performing sectors.
Government policy focus need not translate into equity market returns
Ultimately, what matters to equity markets is growth and visibility of earnings. In the domestic economy that seems to come from consumption driven sectors and certain export-oriented service sectors. However, for individual investors picking themes and sectors in search of relatively higher returns compared to the broad benchmark, is always going to be an uphill task which is best left to fund managers of diversified equity funds.
Regardless of elections and how the outcome can impact corporate earnings, investors are better off sticking to diversified funds where sector choices get reflected in the portfolio composition itself.
Allocating to specific sector or thematic funds increases the risk in the portfolio without enough evidence that incremental return will be proportionate. Such funds add to volatility in portfolio returns which, is best avoided for long term investors.