Source: Moneycontrol.com
Karvy Stock Broking has come out with its report on "Investment strategy ahead of election results - 2014". The research firm advises investing in good quality frontline stocks with a long term perspective in the election results.
Election results and possible market response: Markets are rallying based on expectations that NDA will form the government but it could respond differently post the announcement of exit polls and election results. The Exit Poll surveys will be published on May 12, 2014 after market hours for which markets will respond on May 13, 2014. Nifty could open gap up around 5% if the exit polls are in favour of scenario 1 and Nifty could open gap down around 5% if the exit polls are not in favour of scenario 1. Election results for the 16th Lok Sabha will be announced on May 16, 2014 between 8AM and 5PM which could trigger volatility in Nifty while the numbers are being announced. The index could rally higher under scenario 1, whereas it could remain range bound within 5% under scenario 2. On the contrary, Nifty could see a massive sell-off in case of any occurrence of scenario 3, which was the least factored in by the market.
Scenario 1: NDA getting above 260 seats - Majority of the market participants are of the view that this is the most likely scenario as reflected in the pre market rally between Feb and Apr 2014. The political dynamics could change significantly for every ten incremental seats over and above projected 260, as parties playing the ‘Cat on the Wall’ game could plunge towards the power center. This could facilitate strong leadership and measures for economic growth, which is a long term positive factor for the Indian stock markets. The Nifty could gain over 15% in the next 6 -9 months if the scenario pans out.
Scenario 2: NDA getting around 220 seats - This will be a tad disappointing case for the market participants who factored in the scenario 1. In this case, the government could be formed by post-poll alliances or parties willing to support the government from outside. This may increase the risk of instability and policy logjam depending upon the post-poll alliance parties in the government. The Nifty could move within the 5% range on either side in the next 3 months after which market movement will depend on subsequent political developments.
Scenario 3: NDA getting less than 200 seats - This will be very disappointing for the market participants who factored in the scenario 1. In this case, a third front might try to form the government with direct or in-direct support from the UPA, which could significantly increase the risk of instability and policy logjam. The major concern with the third front is lack of consensus on a prime ministerial candidate among the eleven regional parties who have agreed to work on ‘common ground’. In this case, the markets could completely give-up all the gains in the pre-election rally and correct further depending upon the composition of the government. The Nifty could correct over 15-20% in the next 3-6 months if the government is formed under this scenario.
Investment Strategy: We advise investing in good quality frontline stocks with a long term perspective in anticipation of either scenario 1 or scenario 2 to pan out in the election results. We expect the money to move out of the sectors like IT, Pharma and FMCG which had run-up over the past one year and aren't expected to outperform in the next few quarters over sectors like Private Banks, Infrastructure, Capital Goods & Defence, Power and Oil & Gas. Considering the potential risk involved if the scenario 3 occurs, we advise hedging your holdings by buying May 6800 Put options in equal exposure.
Karvy Stock Broking has come out with its report on "Investment strategy ahead of election results - 2014". The research firm advises investing in good quality frontline stocks with a long term perspective in the election results.
Election results and possible market response: Markets are rallying based on expectations that NDA will form the government but it could respond differently post the announcement of exit polls and election results. The Exit Poll surveys will be published on May 12, 2014 after market hours for which markets will respond on May 13, 2014. Nifty could open gap up around 5% if the exit polls are in favour of scenario 1 and Nifty could open gap down around 5% if the exit polls are not in favour of scenario 1. Election results for the 16th Lok Sabha will be announced on May 16, 2014 between 8AM and 5PM which could trigger volatility in Nifty while the numbers are being announced. The index could rally higher under scenario 1, whereas it could remain range bound within 5% under scenario 2. On the contrary, Nifty could see a massive sell-off in case of any occurrence of scenario 3, which was the least factored in by the market.
Scenario 1: NDA getting above 260 seats - Majority of the market participants are of the view that this is the most likely scenario as reflected in the pre market rally between Feb and Apr 2014. The political dynamics could change significantly for every ten incremental seats over and above projected 260, as parties playing the ‘Cat on the Wall’ game could plunge towards the power center. This could facilitate strong leadership and measures for economic growth, which is a long term positive factor for the Indian stock markets. The Nifty could gain over 15% in the next 6 -9 months if the scenario pans out.
Scenario 2: NDA getting around 220 seats - This will be a tad disappointing case for the market participants who factored in the scenario 1. In this case, the government could be formed by post-poll alliances or parties willing to support the government from outside. This may increase the risk of instability and policy logjam depending upon the post-poll alliance parties in the government. The Nifty could move within the 5% range on either side in the next 3 months after which market movement will depend on subsequent political developments.
Scenario 3: NDA getting less than 200 seats - This will be very disappointing for the market participants who factored in the scenario 1. In this case, a third front might try to form the government with direct or in-direct support from the UPA, which could significantly increase the risk of instability and policy logjam. The major concern with the third front is lack of consensus on a prime ministerial candidate among the eleven regional parties who have agreed to work on ‘common ground’. In this case, the markets could completely give-up all the gains in the pre-election rally and correct further depending upon the composition of the government. The Nifty could correct over 15-20% in the next 3-6 months if the government is formed under this scenario.
Investment Strategy: We advise investing in good quality frontline stocks with a long term perspective in anticipation of either scenario 1 or scenario 2 to pan out in the election results. We expect the money to move out of the sectors like IT, Pharma and FMCG which had run-up over the past one year and aren't expected to outperform in the next few quarters over sectors like Private Banks, Infrastructure, Capital Goods & Defence, Power and Oil & Gas. Considering the potential risk involved if the scenario 3 occurs, we advise hedging your holdings by buying May 6800 Put options in equal exposure.
