'Elections stoke volatility but don't alter market dynamics'

With less than a month remaining until the declaration of results for the 18th Lok Sabha elections, the markets are witnessing a spike in volatility. While the victory for the incumbent Bharatiya Janata Party government has largely been factored into market expectations, the uncertainty surrounding the allocation of seats is stirring some apprehension among investors. NIKET SHAH, the newly appointed chief investment officer (CIO) at Motilal Oswal Mutual Fund (MF), suggests that if the ruling coalition fails to secure a substantial majority, it could exacerbate short-term market volatility. Shah, who oversees assets valued at ₹46,000 crore, shares with Abhishek Kumar via email that valuations remain reasonable, and the potential for higher earnings growth is bolstering the ascent of small and midcap stocks. Edited excerpts:

Some analysts suggest that the general election result may deviate from expectations. Do you perceive this as a risk for the equity market?

A significant majority secured by the current ruling coalition could be viewed positively by the market, potentially boosting investor confidence.  Conversely, if the majority falls short of expectations, it may prompt initial adjustments in investor sentiment. However, it's unlikely that the outcome of the election will have a major longterm effect on the equity markets.

Should the ruling coalition fail to should investors adjust their equity allocation? The Nifty 50 is presently trading at 18 times its forward earnings, closely aligned with its long-term average.

However, small and midcaps are trading at a higher multiple of 25 times forward earnings, driven by growth trends.

Given the elevated valuations along with geopolitical and election risks, should investors adjust their equity allocation?