There will be a wave of optimism in markets till election day

As the election season reaches its business end, stocks are reaching new highs and this bull run is likely to continue till mid-May, say Devangshu Datta.

Every ordinary citizen will heave a sigh of relief on May 16, when all the votes are counted and the tamasha of this high-decibel election is over and done with. Until then, market-trading patterns will be largely dominated by electoral expectations.  

There is a mismatch when one matches the political rhetoric and opinion polls to the trade data. Foreign institutional investors (FIIs) are supposedly betting heavily on a stable "Modi-Sarkar", given the quanta of cash (over Rs 27,000 crore or Rs 270 billion)) they have pushed into Indian equity in the past five weeks. 

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Domestic institutional investors (DIIs) have sold over Rs 14,000 crore ( Rs 140 billion) of equity during the same period.

Since the FII buying is surplus over DII selling, there is a presumption that domestic retail has also been selling.  

If one goes by the old adage of putting money where the mouth is, DIIs and domestic retail are both less than sanguine about a stable, efficient government taking charge. FIIs are confident of this. Yet, every domestic opinion poll shows the Bharatiya Janata Party (BJP) well in front, with leads getting stronger.

And, public opinion abroad has hardened against the BJP, going by recent opinions in overseas media. Ergo, the money isn't going where the mouth is, at least not yet.

If a BJP-led government does, indeed, perform as well as the opinion polls predict, the 16th Lok Sabha will have fair chances of stability.

The stock market should go stratospheric, as the fence-sitters and pessimists will then defect to the bullish camp.

If there are strong inflows, the rupee could harden to the levels of Rs 55 or lower, where the Reserve Bank of India (RBI) governor says it would be too strong.  

The central bank is braced for a rough ride, whatever happens. If Parliament is hung, there could be a rupee crash, if FIIs exit in droves. 

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The reserves situation is more comfortable at $300 billion-plus than it had been since December 2011.

The RBI might need to deplete that buffer if Rs 25,000 crore ( Rs 250 billion) or more is pulled out in a matter of a few weeks.

It might also need to buy dollar in quantity and carry out a big sterilisation if the rupee rises to 55 on the back of a decisive electoral verdict.  

A couple of data points may help gauge sentiment, and likely levels of post-election volatility.

Outstanding puts and calls in the June Nifty options contract must reflect election expectations. Similarly, the December Nifty options positions should reflect end-year expectations.

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There is a mismatch when one matches the political rhetoric and opinion polls to the trade data. Foreign institutional investors (FIIs) are supposedly betting heavily on a stable "Modi-Sarkar", given the quanta of cash (over Rs 27,000 crore or Rs 270 billion)) they have pushed into Indian equity in the past five weeks.

Domestic institutional investors (DIIs) have sold over Rs 14,000 crore ( Rs 140 billion) of equity during the same period. Since the FII buying is surplus over DII selling, there is a presumption that domestic retail has also been selling.

...

If one goes by the old adage of putting money where the mouth is, DIIs and domestic retail are both less than sanguine about a stable, efficient government taking charge.

FIIs are confident of this. Yet, every domestic opinion poll shows the Bharatiya Janata Party (BJP) well in front, with leads getting stronger.

And, public opinion abroad has hardened against the BJP, going by recent opinions in overseas media. Ergo, the money isn't going where the mouth is, at least not yet.

....

If a BJP-led government does, indeed, perform as well as the opinion polls predict, the 16th Lok Sabha will have fair chances of stability.

The stock market should go stratospheric, as the fence-sitters and pessimists will then defect to the bullish camp.

If there are strong inflows, the rupee could harden to the levels of Rs 55 or lower, where the Reserve Bank of India (RBI) governor says it would be too strong.  

The central bank is braced for a rough ride, whatever happens. If Parliament is hung, there could be a rupee crash, if FIIs exit in droves. 

....

In both those months, outstanding calls far outnumber puts, which means an excess of optimism.

In the June contract, the outstanding call open interest is clustered at the Nifty strikes of 7,000 call and 7,500 call.

The largest open interest in June puts is clustered at 6,000 put, with another big bulge at 5,000 put. In the December contract, there is massive open interest in the 8,000 call and the 5,000 put.

...

The Nifty closed at 6,695 on Friday.

The open interest situations suggest that some optimists expect the index to gain 20 per cent or more by December and some expect a surge of 12-13 per cent by June.

There are also pessimists (or hedgers), who see a possible decline of 25 per cent, including a few big bears who see a 25-per cent drop in June itself.

 In the meantime, the RBI has concluded both its first policy review of the 2014-15 fiscal and granted banking licences in-principle to IDFC and Bandhan.

It has not granted licences to the industrial houses, which had applied. Nor has it touched policy rates or the cash reserve ratio in the review.

Raghuram Rajan says he will keep rates (and probably money supply) stable at current levels if inflation continues to move down.

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Assuming there's no inflationary spike in April-May (this is a big assumption), the central bank will probably do nothing in June because it will want to assess the new Budget.

Given the train-loads of cash involved in a general election and the warnings about a sub-par monsoon, there is, however, a fair chance that inflation will rise.  

Meanwhile, on the external front, the world is gradually reconciling to the China slowdown.

The US will probably have to cut Q1 (January-March 2014) estimates, due to a surprisingly high trade gap.

But private sector hiring looks strong and the taper remains on track.

....

Pharma companies are hoping the Food and Drug Administration (FDA) will relent after it admitted that some of its tests had contaminated samples.

Select pharma shares have zoomed in that hope. But cold analysis of what the FDA has said and done suggests hopes may be belied.

If the rupee strengthens further and opinion about the FDA's future actions takes another U-turn, this could be a nice sector to short.

 ...

Meanwhile, Commerce Minister Anand Sharma, is desperately trying to spin doctor the Ghaziabad court summons to the Samsung Chairman, Lee Kun-hee.

Without debating the merits of the case, transnational corporations will see this as yet another signal that India is not a conducive environment for business.

Nokia, Vodafone, Samsung, Posco, flip-flops on retail, the cancellation of 2G licences - the list just keeps getting longer.

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The less than stellar relationship between the US and India is also unlikely to be improved by the recent downgrade of India's civil aviation safety rating.

If the BJP does come to power, it will have to work hard at rebuilding bridges with the world's richest democracy.  

In the meantime, the Nifty and Sensex have been breaking records, session after session. This bull run is very likely to continue till mid-May.

It is a great pity that the Election Commission would, quite justifiably, scream blue murder if the disinvestment programme was fast-tracked to take advantage of it.

But the surf's up and there's nothing to prevent punters from riding the wave.