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Last Updated : May 18, 2019 08:19 AM IST | Source: Moneycontrol.com

Fear of the unknown: Is the market discounting election results?

MSCI Emerging Market Index is up by 6.1 percent, but MSCI India is almost flat with measly 0.7 percent appreciation. India is hugely underperforming.

Moneycontrol Contributor @moneycontrolcom

Dr VK Vijayakumar

Polling for around 480 Lok Sabha seats is already over. Perhaps the question now is who will govern India in the next 5 years. The exit polls are likely to give us a probable trend.

Results of the exit polls will be published only on May 19th after the elections are over. But, it is important to note that the exit polls for all but 59 seats have been done and the results are also known, though not in the public domain.

The top people in the agencies that did the polls, the influential editors of news channels and those who commissioned the polls, know the results.

It is quite probable that even some political parties may have commissioned polls. It is quite probable that a section of the market knows and is slowly discounting this.

It is evident that the market is not fully discounting an NDA victory. Which is why we witnessed 9 consecutive days of losses in the market. It is important to note that India is underperforming in the global bull-run underway in 2019.

As on May 15, the MSCI All Country Index is up by 11.6 percent. MSCI US and MSCI EMU are up by 14 and 12.2 percent respectively.

MSCI Emerging Market Index is up by 6.1 percent, but MSCI India is almost flat with measly 0.7 percent appreciation. India is hugely underperforming.

Why? It is probable that the market is discounting some bad news.

What can be the likely bad news? At this stage, those of us without access to the exit poll results can only hazard a reasoned guess.

It is likely that the NDA may fall short of a majority and might cobble up a coalition with support from some non-NDA parties. A weak coalition, unable to push through tough reforms, may not enthuse the market.

Worse still, if the NDA fails to reach say 230 seats, it is quite possible that the Congress will support a 'Third Front' government without participating in it. This is the scenario that the market dreads, but can't be ruled out.

What should investors do?

Speculators are taking all kinds of positions and hedges in the derivatives market. That is for the sophisticated traders and speculators. Ordinary investors need not go into complex derivative plays.

Of course, investors can hedge their portfolios by buying Put options. Beyond that, they can adopt safe strategies based on exit poll results or even after the actual results.

For example, suppose the Third Front Scenario plays out: This is likely to lead to a major correction in the market. The short-term panic in the market will make stocks attractive and this would provide opportunities for investors to buy beaten-down quality stocks.

The short-term overreaction is not likely to last long. It is a known fact that politics does not matter in the long run. More importantly, corporate earnings in India will not be impacted by a change of government.

Presently 20 percent of corporate earnings come from IT, which has nothing to do with the government and 30 percent from materials like energy and metals whose prices are determined globally.

So 50 percent of corporate earnings are not impacted at all by who forms the government. Therefore, if a panic correction happens, that would be an opportunity to buy.

If the exit polls clearly indicate the return of NDA, investors may utilize the opportunity to buy before the actual election results, because the market is likely to rise sharply, more than compensating for the relative underperformance of India. In brief, there are opportunities ahead.

(The author is Chief Investment Strategist at Geojit Financial Services)

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on May 18, 2019 08:19 am
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