A new financial year has begun on a positive note. Flows seem to be improving from both domestic and foreign investors. Indices are setting themselves up for new highs. Yet, index valuations already look very much on the higher side of the band. Growth seems to be stable but inadequate to justify a rapid expansion of valuations. And the markets seem very much set to be irrational.

But, the good news is that a part of this irrational behaviour is very likely to benefit the value school of investing which has long suffered due to broader investor neglect. Several boring sectors which traded at valuations that the value school liked immensely are set to start growing earnings again. These sectors are drawing the attention of large investors. A strong and clear electoral verdict will see flows spike up further. And these flows will find their way into value stocks which were hitherto neglected. Sectoral rotation is always a function of flows and this time will be no different.
Investors must learn to rotate their investment focus quickly to stay just ahead of this upcoming sectoral rotation. This will yield very good dividends if the electoral trade plays out decisively. If the election trade turns out to be a shocker, investors will still not lose too much if they bet on value stocks. Such a trade seems the best bet to ensure that in this electoral toss-up, “if it is heads you win, and if it is tails, you don’t lose too much.”.

It promises to be a fascinating trading summer.

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