Lok Sabha election 2019 results: Investors brace for hectic trade

The NDA not returning to power will be a jolt to the market and stocks could see a knee-jerk reaction
The counting of votes will start at 8 am and a clear trend will emerge in the second half of the day. The Sensex and Nifty have gained 3.1 per cent this week in anticipation that the incumbent NDA government will retain power with a comfortable majority, as indicated by most exit polls. Here is a primer on what to expect in Thursday’s trade. 

How will the stock market open?

The market could open sharply higher or lower depending on the NDA’s performance, analysts say. Also, until a clear trend emerges, stocks in high-beta sectors like banking could see huge swings. The Nifty has swung an average 8.8 per cent on the previous five result days. 

How will the market react if the results mirror the exit polls?

Experts say the market has largely priced in an NDA victory, but don’t rule out a further up move if the NDA gets a majority. The Nifty, they say, could breach 12,000, a 2.2 per cent rise from the current level.

If the BJP-led NDA does not form the government...

The NDA not returning to power will be a jolt to the market and stocks could see a knee-jerk reaction. According to market experts, the benchmark indices could correct 5-10 per cent in case the NDA falls short of the majority mark.

The extent of fall will depend on the composition of seats. A higher tally for the Congress won’t be too much negative but the possibility of a third-front government could lead to a sharp sell-off, they say.

Do current valuations support another big rally like the one seen on Monday?

Analysts say the indices are currently trading above their long-term averages. The Nifty is trading at about 18 times its one-year forward earnings estimate compared to a 10-year average of 16 times. However, the market might overshoot valuations in the near term if the election results are favourable.

Will foreign investor sentiment improve if the NDA returns?

UBS in a note has said most overseas investors are factoring in a Modi win. This week, foreign portfolio investors (FPIs) were seen stepping up their buying. If the results are satisfactory, there could be a surge in FPI flows in the near term, say experts. This will be on account of increasing country allocation for India in the hope of economic reforms and improvement in corporate earnings.

How are traders positioning for the day of election results?

Traders have mounted bets on far-out-of-the-money Nifty strikes of 12,500 and even 13,000. The open interest -- which is the number of outstanding contracts – is 1.69 million in 12,000 strike price and 1.68 million in 12,500 strike price. Further, even 'call' option of 13,000 strike price -- which is significantly higher than current levels -- has started seeing a sizeable build-up.

Do elections have any long-term impact on market?

Market experts say elections typically don’t have a long-term bearing on the market. However, like any big event, they lead to a lot of volatility in the short term. But once the event is over more fundamental issues like corporate earnings growth, economic outlook, and interest rates trajectory determine the market’s performance.

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