Anxiety grips investors ahead of election verdict

May 14th, 2009 - 1:36 pm ICT by IANS  

Sensex By James Jose
Mumbai, May 14 (IANS) With counting of votes for the ensuing national elections due May 16, and no party or group seen emerging clear winner, Indian stock markets are once again edgy, in a repeat of volatile trading witnessed during the similar situations in the past.

The sensitive index (Sensex) of the Bombay Stock Exchange (BSE), often described as the barometer of Indian equities, rose nearly 10 percent in the nine straight weeks ended May 8, to make it the longest weekly rally since July 24, 2006. But trading has turned volatile thereafter.

There is a distinct sense of disquiet among the investors, because of which the 30-share key index has been fluctuating wildly in a range of more than 650 points, or over 5 percent, this month.

The only saving grace for the weak-hearted, speculators and analysts maintained, is that May 16, when the votes will be counted, is a Saturday, when stock markets across the country will remain shut.

Nothing reflects the fluctuation better than the India Volatility Index of the National Stock Exchange (NSE).

This index, which measures markets expectations of volatility over the near term, stood at a whopping 50.73 points May 13. Typically, a level of 25-30 points reflects stability and anything above 35 points indicates risk.

“The market becomes edgy whenever there is uncertainty,” said Avinash Gupta, assistant vice president with leading brokerage Bonanza. “This does not immediately end with the formation of a government. The agenda of coalition partners also concerns the market,” Gupta told IANS.

Picture this: In October 1999, when the National Democratic Alliance (NDA) returned to power after a snap poll, the Sensex fell about 7.5 percent primarily on fears that then prime minister Atal Bihari Vajpayee may not be able to hold the new coalition together. The previous alliance, after all, had collapsed abruptly.

Then in May 2004, on the eve of the United Progressive Alliance (UPA) taking over the reins, the key index plummeted 15.7 percent, as investors were rattled that the NDA - which by then was seen as investor friendly - would not return to power.

“Such high volatility is usually the doing of speculators and hedge funds who do event-based trading for a fast buck. Uncertain political situation is a chance to capitalise on investor fears,” said Jagannadham Thunuguntla, equity head at SMC Capitals.

Agreed Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry (FICCI), who said there was a major difference between how the corporate sector viewed elections and how the market investor looked at it.

“Corporates look at fundamentals and long-term policy stability, while secondary market players tend to view the short-term gains or losses. For speculators, even a short-term period of uncertainty can cause nervousness,” Mitra told IANS.

“Naturally this time, when the Congress says it will be a close call, the Bharatiya Janata Party says it will be touch-and-go and the Third Front says it will try to form a government of its own, there is that bit of short-term concern.”

This explains the reason behind the current volatility, where there is no clear signal yet on which coalition will form the next government, raising questions over stability and continuity in governance and policies - at least for speculators.

“History suggests that as long as a stable coalition comes to power, the impact on sentiment and activity is likely to be positive,” said Tushar Poddar, vice president for Asia Economics Research with leading consultancy Goldman Sachs.

“A lower probability event in our view is that the election outcome is seen as unstable due to a fractured mandate. Such a result would be negative for policy-making and for markets in the short-term.”

Echoing similar sentiments, Gupta is more forthright and says the worst fears for the markets is the Third Front coming to power, with the active backing of Left parties.

“It would jolt the market badly,” he said. “The Left is expected to hamper reforms.”

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