How foreign investors were perfectly positioned for counting day, but got foxed by exit polls

In terms of sectors, Balanco believes that Public Sector Units (PSUs) still have significant upside potential of over 60 percent.

Amid all the noise over who sold, who bought, and who benefited from the turbulent election week, data analysed by Moneycontrol reveals that foreign investors had perfectly positioned themselves for an adverse election outcome but were caught on the wrong foot by the exit poll.

Interestingly, foreign investors were correct in calling the past two elections in 2014 and 2019, positioning themselves substantially on the long side. Their call worked to their advantage as the final election outcome exceeded the exit poll estimates, yielding them a better-than-anticipated payoff. This time however was different.

Starting off the month of May with one-third of their position at the long end and two-thirds at the short end, foreign investors steadily raised their bullish bets to achieve a long-short ratio of 54%, representing a near-neutral stance on May 28. Two days later, on May 30, they dramatically cut their long positions and added to their shorts, dragging the long-short ratio to 13%, the lowest in three years. The speed of change in stance was unprecedented.

Maintaining the same position, they ended up on the losing side on Monday with the market recording a 3% jump reacting to the exit poll results. Their net position (long minus short) on June 3 stood at a negative 1,96,944 contracts. After a day of short covering, on June 3, they once again turned bearish on the counting day, adding to their shorts and cutting their longs, taking their long-short ratio back to 12%, and net position to minus 355,379 contracts.

Since June 4, however, foreign investors have steadily cut their net position to 192,842 contracts, taking the long-short ratio up to nearly 30%. Traders say this indicates substantial shorts in the market which will take at least a month to unwind, going by past trends.

Clients, who mostly represent Indian retail traders, and the biggest constituency in the derivatives market, were more or less the mirror image of this. They were consistently positioned at the long end, with net long zooming to as much as 3,13,903 contracts on May 31, ahead of exit polls. They cut their longs on the exit poll day to 1,88,597, only to raise it back to 333,364 on June 4. They have been cutting their longs ever since, down to 1,23,008 contracts on June 7.

The other two category of investors i e domestic institutions and prop traders, the former only hedge positions in the futures market to manage their arbitrage portfolios, rather than take directional calls on the market. Prop traders on the contrary were increasing their net shorts, before turning bullish two days ahead of the exit poll and have continued to continuously increase their net long baring on June 3.

In the cash market, foreign institutions made modest net buying on May 31 (Rs 1,500 crore) followed by heavy buying on June 3 (Rs 6,600 crore) when the market reacted positively to the exit poll, but turned heavy sellers on June 4 with net sales of Rs 12,500 crore and June 5 with net sales of Rs 6,500 crore.