Rakesh Jhunjhunwala, ranked a billionaire by Forbes magazine last year for his Indian stock holdings, is of the opinion that investors should avoid the markets after nationwide elections until a new government is formed.
The five-stage election across the world’s biggest democracy started today. The counting begins on May 16.
On May 17, 2004, when the United Progressive Alliance (UPA) was formed, led by the Congress party in coalition with the Communist party and others, the Bombay Stock Exchange’s Sensitive Index had plunged 11 per cent. Investors feared that the government formed by the Congress and Communists would slow the pace of reforms.
The markets more than tripled since 2004, before dropping 52 per cent last year after a global credit crisis wiped out more than $30 trillion from the value of equities. The Sensex fell 3 per cent to 10,947.40 points, the first drop in nine days.
Prime Minister Manmohan Singh’s Congress Party-led UPA is competing with the main opposition Bharatiya Janata Party-(BJP-) led National Democratic Alliance (NDA) and a Third Front front comprising of communist and regional parties.
“It’s a very closely fought election,” Jhunjhunwala said. “It’s a triangular contest and to predict the result would be very difficult.”
Jhunjhunwala said that even though some forecasters are predicting a Third Front-led government, he expects either the Congress or the BJP to get 150 to 170 seats and to lead formation of the government. About 714 million voters are eligible to elect 543 lawmakers to the Lok Sabha.
The Indian stocks, laggards among the world’s biggest emerging-market economies in the first quarter, recovered to post the steepest returns the past month as investors snapped up the cheapest shares in 13 years.
The Sensex climbed 34 per cent since falling to its lowest level this year on March 9. The advance beat increases among equity benchmark indexes for Brazil, Russia and China, the biggest developing economies.
“The pace, breadth and volume of the market suggest this could be more than a bear market rally,” said Jhunjhunwala, who has pictures of investors including Warren Buffett on the walls of his Mumbai office.
Buffett of India
Forbes named Jhunjhunwala the Buffett of India after he turned a $100 investment into $1 billion over two decades. He predicted Indian stocks would fall two months before the Sensex peaked in January 2008, and the benchmark measure has gained 17 per cent since his December 11 prediction of a bull run. The MSCI Asia Pacific Index rose 1 per cent during that time.
The Sensex has crossed its 200-day moving average and if it remains above that level over the next 10 to 15 days, the rally may be sustained, he said. Still, he doesn’t see the markets forming new lows. The moving average is a technical tool used by some analysts to predict the direction of the market.
Investments by Indian insurance companies will be the biggest drivers of the equity market, Jhunjhunwala said. Insurers could invest about $50 billion a year in the next 2-3 years, he said.
“The scope for disappointment is not much,” Jhunjhunwala said. “There are no positive expectations from the election results. Markets may not tank this time round even if the result is something that the market may not like.”