The pre-election market rally - Is it sustainable ?

The pre election market rally in India is a much celebrated event. It has been a feature of the Indian markets for the past elections, and it hasn’t failed the investor this time around too (at least till date). The rally in the markets is in full swing, with the Sensex and Nifty closing at record highs of 21919 and 6526 respectively on Friday (7^th March 2014).

Such pre-election rallies ride predominantly on the back of sentiments. However, the important question here is, is there enough to sustain the rally, and the highs the markets have reached? A quick look at the macros suggests the following:

• Expectations of CAD to end up at near 2% levels of GDP for the current financial year. The CAD is down 55% on a year on year basis largely driven by trade deficit that is down over 25%
• Positive Sentiment on the rupee. The Rupee has gained almost 10% since falling to all time low of 68.80 against the dollar. The rupee ended at 61.07 against the dollar on Friday
• Easing crisis in the Ukraine
• Indian economy has also performed much better as compared to the other EMs as far as the performance to Quantitative Tapering is concerned. This has helped rebuild the faith of the foreign investors in the Indian markets
• The FIIS have bought almost 1.5 billion USD in Indian markets in the past few days. The FIIs have turned net-buyers in January and February 2014 with net purchases of USD 4.8 billion.

However, the fact remains that the rally is purely sentiment driven. The Adani group, which is perceived to be close to Modi, has been one of the biggest gainers, with Adani Enterprise gaining a whopping 40% since mid February this year. The markets are expecting that Modi led NDA will form the next government and everything will be all right in India. Even if NDA does come in to power, there is a lot of work ahead. By no means is the Indian economy back on track, and should the election results spring a surprise or even if it doesn’t, should the NDA government falter, the effect it will have on the Indian markets will be dangerous.

It is advisable to not get swayed by this sentiment-driven rally, since the inherent volatility of the Indian markets may have an adverse impact on your portfolio. However, investing in fundamentally strong stocks would help one reap the benefits of this sentiment-driven rally, and will also protect one’s portfolio against possible downslides in the future.

-          - Sufiyan Sarguroh

 SIMSREE Finance Forum

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