India Markets Weekahead: Markets move into pre-election rally

March 9, 2014

(Any opinions expressed here are those of the author and not of Thomson Reuters)

A spectacular rally in the last few days has put the market in a pre-election mode, buoyant with hopes of a stable and reform-oriented government. Led by institutional buying and the resultant short squeeze, the markets rallied more than 3 percent in the last two trading sessions – closing the week at 6526, a record high for Nifty. The markets seemed to have moved into a new territory with metals, realty, banking, capital goods, infrastructure and energy sectors participating in the rally.

 Generally, the data points for a pre-election rally are the developments on political activities and opinion polls. The economic data takes a backseat in this “rally of hope” and markets take a keen interest in electoral analysis.

FIIs have pumped in about $500 million in March and India seems to be the preferred destination among emerging economies. This was aided by improved current account deficit which resulted in a strong appreciation of the rupee to below 61/USD, a three-month high. Ukraine crisis will continue bothering the markets but the effect on India will be minimal because of the influence of elections. I believe that the U.S. will not act beyond issuing threats as that may have far reaching consequences for the euro zone as well as for its own economy. The March 16 Crimea referendum and subsequent events would be keenly watched.

In the present conditions, I would lay higher emphasis on sentiment rather than on past data. The manufacturing PMI was favorable at 52.5, reflecting confidence and indicating that the worst is behind us. This confidence will result in increased spending and asset building if backed by a stable government. The wholesale price index and consumer price index data this week will be benign and act as catalyst. January industrial production data will be announced on Wednesday and is expected to show contraction.

The current market rally is expected to continue for the next few weeks with intermittent bouts of profit booking. At Nifty levels of above 6800, the best of the election expectations would be priced in and it could be time to take some profits off the table.

We saw market expectations go completely awry in the 2004 elections, thus betting without a hedge could be a dangerous trade. Last week, there was an interest mostly in the front line large caps and a few mid cap stocks, a general trend at the start of an intermediate rally. Most of the underperformers of the last few years will gain and IT, pharma and FMCG sectors could take a back seat. For those who want to build a long term core portfolio, it could be an opportune time to buy into these three sectors. Others should look at riding this rally wherein the “India re-building” sectors would perform well.

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