Market has been rallying on hopes of a regime change at the center post 2014 general elections. Foreign brokerages too believe that a Modi-led government will be good for the Indian economy. Numerous exit polls point towards swelling numbers in favour of the saffron party —making the case stronger for this rally. But entry of the no-nonsense man - Arvind Kejriwal's Aam Aadmi party has somewhat dented the prospect of a sweeping victory for the lotus besotted party.
Benchmark stock indices Sensex and Nifty rose 6.7% and 7.6% respectively, in the past one month on poll outcome exuberance. An improvement in the country’s fiscal situation coupled with rupee a rise act as magnet for loose foreign liquidity.
Foreign institutional investors (FIIs) pumped a whopping Rs 22,161 crore in the month of March.
"This rally is nothing but the market’s endorsement of the recent opinion polls in favour of a NDA. government. Add to it a stable currency, bottoming-out of GDP growth and drop in inflation and you will see no hurdles in the near-term. Besides, India’s relative attractiveness has improved with investors not keen on weakened emerging economies like China, Korea, Taiwan, etc. The near-term risk is the election outcome itself since a hung parliament will conclusively spoil the party," says Amar Ambani, Head of Research - India Infoline Ltd.
However, a rewind to recent history shows that market men do not take kindly to what they don’t anticipate. Sensex fall a massive 11% on May 17,2014 marking its biggest one day fall in its history when the Congress came back to power with outside support from the Left.
So, will a fractured mandate see markets erase all gains? Analysts fear it could.
"The current hope rally is expected to continue with intermittent corrections and incase the expectations come out to be true, the rally will continue beyond the results on May 16 on the big ticket reforms hope in the budget to be announced in July. However, if the mandate is highly fractured and inconclusive leading to unstable government formation, I foresee at least 10% correction or more from the current levels," says Aviral Gupta, Founder & Investment Strategist at Mynte Advisors.
But for now, a binging spree on liquidity continues as investors bet aggressively on high-beta cyclicals such as banks and capital goods, is the norm.
"The stock market has already seen a price and time correction in the last six years. A change of guard at the Centre, favorable demographics, conservative banking system (notwithstanding near term asset quality concerns) and supportive valuations most certainly augur well for a long market run.
For this year alone, we anticipate a major market run-up to take place in the first half of 2014, even before the new government assumes office. The post election phase (H2 2014) will be one of consolidation, driven by slow economic recovery and global factors," says Ambani.
Traditionally defensive themes like FMCG, pharma and IT have now taken a back seat while investors indulge in riskier bets.
In the past one month, market's darling of yore –Information Technology stocks, gave negative returns with BSE IT index shedding almost 8% in the last one month. BSE FMCG and Healthcare during the same period returned -2.60% and 6.36% respectively, underperforming benchmark Sensex’s 6.7% growth in the period.
Meanwhile, BSE capital goods returned 16.28% while Bankex rose 17.89% on poll results exuberance. This bears testimony to the fact that investors are taking aggressive bets and investing in high-beta plays.
But experts are of the view that market could correct significantly post May and enter a consolidation thereof as there are near-term hurdles that threaten this bull-run. An unfavourable poll outcome, reduction in US tapering coupled with an increase in interest rates could spell havoc for FIIs sentiment.
"It looks like in 6-8 months’ time the US will start raising interest rates in the economy. Coupled with the ongoing Fed taper, this could result in a prominent flight of capital from emerging markets causing the INR to go weak again. Emerging markets like India run the risk of high FII ownership (currently at an all-time high). Any currency depreciation would only mean sticky inflation and the high interest rate cycle may get protracted at a time when our saving-investment gap is still high," says Ambani.
So shouldn’t investors be hedging their risky positions if the unthinkable happens? Chandan Taparia, Derivative Analyst at Anand Rathi Financial Services shares with us his top hedging strategy in the run-up to elections. He also spoke on index and stocks in the F&O segment for April expiry:
Nifty 6400 Put and 6900 Call witnessed maximum Open Interest (OI) build-up on April 3. What is your take on Nifty in the F&O segment for April expiry?
Yesterday Nifty future fell down from 6800 levels but Put Call Ratio moved up from 0.98 to 1.05 levels and we observed fresh Put writing in 6400, 6500 and 6600 strike and maximum Call OI shifted to 6900 strike. Nifty future has rallied well with FIIs flow and yesterday FIIs- DIIs flow was net to net zero in cash segment. Overall data are indicating that we may see some sideways consolidation before taking any fresh move in the market. We are expecting Nifty spot to find support at around 6666 zone and hurdle at around 6767 levels. So the immediate trading range would be 6666 to 6767 levels for next coming trading sessions. Till FIIs flow doesn’t stop and they don’t turn to net big negative figure buy on decline would be the market strategy
What are your top hedging bets in the run-up to the election?
Nifty has seen decent run up in last two months and now showi8ng some sign of pause or profit booking and at the same time volatility is also rising that indicates that now risk is rising for taking position in the market. Traders are advised to take respective puts or in Nifty go for 6750-6550 bear put spread to hedge the long position.
India VIX spiked to its 4-month levels during in day's trades but closed 1.2% lower owing to buying in last 15 minutes of trade. It is trading at 22.65 levels today. How is the volatility likely to be in the near-term?
Yes, VIX is at 4 months high levels and expecting it to rise in near term towards 23.50-24. We are at life time highs and heading towards political scenario so this volatility is not likely to cool off on immediate basis.
Ranbaxy has bounced back from Rs 390 levels, touched in late January. The counter witnessed a spurt in OI today in the options segment for April expiry? Is it advisable to go long here.
Yes this stock has seen significant OI addition and given up move as it crossed above immediate hurdle of 376 levels. Now it has immediate hurdle at around 470-475 zone. Now traders are advised to book partial profit on rise as it is a stock from pharma segment but has the nature of high beta.
IDFC has been focus lately; the counter is buzzing in the options segment for April expiry. Your take.
