Investors Beware! Elections Have The Potential To Surprise

Barring 2014, when Narendra Modi romped home, as was widely expected, election results have thrown-in a surprise.Stocks markets have gone wild, betting on another term for Narendra Modi. The Sensex and the Nifty are trading at record levels, led by some solid buying by Foreign Portfolio Investors, particularly ETFs. These type of funds are not sticky and can immediately withdraw money. Last week, we had a fantastic rally in which the Sensex gained a huge 3.7 per cent and on the back of it, markets are now up another 0.8 per cent today, taking the rally to 4.5 per cent in a span of 6 trading days.There seems to be no breather for the market, which is really worrying. If we have a coalition government, be rest assured that the benchmark indices are going to tank. It is time to therefore exercise some caution before investing. There are many stocks that are beaten down and one needs to look beyond the indices. For example, despite the rally we see some stocks like Coal India and IndiaBulls Housing, which are part of the Nifty, trading at attractive levels. Graphite India, a stock into Graphite Electrode has seen its stock being halved in the last few months.These are stocks that look attractive, especially for their dividend yields. It is unlikely that they will see too much of a downside, given the fact that dividend yield will protect a catapulation in stock prices. Banking stocks are unlikely to offer great risk-reward ratio, given the fact that they have already run-up sharply.The gains have largely come on the back of heavy buying from Foreign Institutional Investors. Should the trend continue, there could be some more upside, but, when that happens the risk to reward ratio starts falling.In our opinion, it maybe time to start booking profits and sitting on cash. We have been listening to the earnings story for many quarters now. In fact, most analysts have been talking of an earnings revival, which has never happened. One is not sure, whether 2019-20, would see the beginning of this revival. The Sensex trailing p/e is now 26 times and even if earnings were to grow at 15 per cent in the next two years, the markets still look overvalued.Clearly, our own belief is that at the index levels, the markets are overvalued, though at the more broader levels in terms of midcaps and small caps, there may still be some opportunities.