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Markets on fire, brokerages advise caution

A host of brokerages have asked investors to trade cautiously saying the uncertainty with regard to the outcome of Lok Sabha elections continues, even as stock markets have scaled new highs on the hopes of BJP-led coalition coming to power at the Centre.
Exit polls on close of the nine-phased elections on Monday had projected 249-290 seats to the Narendra Modi-led BJP, which is close to the half-way mark in the 543-member Lok Sabha.

Some brokerages are of the view that though the markets are on a rapid rise investors should stay cautious ahead of the general elections results on 16 May as both the opinion and exit polls had misjudged the final outcome in 2004 and 2009.
These brokerages are Credit Suisse, Barclays, UBS, Citigroup, Nomura, Karvy Securities, Nirmal Bang securities and WealthRays. According to a UBS research report, the India VIX (volatility index) has gone up to 37.1 as of now (it had touched a high of 56 in May, 2009) from below 30 a month ago.

‘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,’ Karvy said in a research report.

On Monday, the Bombay Stock Exchange (BSE) benchmark index Sensex and National Stock Exchange (NSE) barometer Nifty  surged to their second straight record closing high on continued fund inflows on hopes of a stable government. It continued its golden-run on Tuesday as well on exit poll results.  Nirmal Bang Securities said: ‘While the market is likely to react in euphoria to these exit polls this morning( Tuesday), as has been the case on Friday & Monday, we would advise erring on the side of caution.’
Analysts asked investors not to bet on such numbers as they believe that the NDA win has already been factored in.
‘While the rally since then suggests a higher number is priced in, exit poll results seem to be still higher. However, we are still in a range of high uncertainty....,’ Credit Suisse said in a research note, adding that ‘16 May may still
throw surprises’.

Stock markets are widely expected to witness huge volatility on 16 May. It may be noted that both Sensex and Nifty had hit their upper circuit levels within minutes of opening on 18 May, 2009 when early trends in the previous Lok Sabha elections started trickling in.
Nomura in a research report said: ‘We view exit polls with some caution based on the results in 2004 and 2009, and especially in this case where there appears to be a differential between them and the majority of pre-election opinion polls.’
WealthRays in a research report said a strong majority could see a huge rise in the stock market due to the formation of a stable government and the expectation of rise in GDP, while a fractured mandate could lead to steep fall in the stock market due to an unstable government that could lead to decision making complexities.

‘A positive election outcome may not yet be priced in. In our view, a more euphoric sentiment among investors (NDA near or more than 272) would likely imply higher multiples, though sustainability would depend on actual delivery in policymaking hopes,’ UBS said.

The Nifty had hit lower circuits and lost over 20 per cent in two trading sessions on 14 May and 17 May, 2004 after 14th Lok Sabha General Election results.
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