India Market Weekahead: Ride the election rally with some caution

April 6, 2014

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

The Nifty touched a high of 6758 during the week, part of a market rally for 10 consecutive sessions – the longest streak in five years.‎ An overdue correction set in towards the end of the week with the Nifty ending flat at 6694.

Advance-decline data suggests that interest is shifting to the small and mid-cap space where advances outpaced declines. Although we are touching new highs, the missing euphoria indicates investor caution  that is good for the health of the market.

As expected, the Reserve Bank of India maintained the status quo at its policy meet but the commentary was more hawkish. The El Nino effect on the monsoon would be watched closely by the central bank governor as well as market participants as this could negate the possible election outcome of a stable government.

India’s core sector grew by 4.5 percent in February compared with 1.6 percent in January but HSBC PMI manufacturing data for March dipped to 51.3 points from 52.7 points in February. Services PMI touched a three-month low of 47.5, indicating a contraction.

The keenly awaited U.S. jobs data added 192,000 jobs, leading to an expectation that the Federal Reserve will continue tapering. The threat of the Russian-Ukraine crisis blowing up has subsided to a large extent but the economic fallout will be gauged in the coming weeks.

The first phase of polling starts on April 7, with the Bharatiya Janata Party yet to unveil its election manifesto.‎ Markets could continue to be volatile. A higher voter turnout would be viewed as an anti-incumbency factor. It is expected that the BJP manifesto would focus on development and boosting growth in the agriculture and manufacturing sectors.

We could see further interest in the infrastructure and capital goods sector. Trade and IIP data would be announced towards the end of the week with minutes of the FOMC meeting in March also expected.

The coming week would be a truncated one due to a holiday on Tuesday, but should be packed with action. The markets are firmly in a bull grip and every correction would be bought into. The Nifty could scale to the 6800-7000 band but the outperformers would be the mid-cap and small-cap segment. The risk-reward would get skewed as we move higher, as that would price in the most favourable outcome for the elections.

In case we have a stable reforms-oriented government at the centre, we could see the rally extending further for a few months. The reality check would happen after the honeymoon period. Conversely, if the outcome is a weak government or a fractured mandate, we could see a sharp correction as equities will again be relegated to the back benches and we could see a flight of capital to risk-free assets.

Riding the current rally is recommended but booking out of long positions before the election results would be prudent.

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