Are markets factoring in the possibility of early elections?

Political developments have taken centre stage yet again this week after the Railway Board bribery controversy made headlines and threatened to shorten the United Progressive Alliance's (UPA) tenure at the Centre.

Dubbed 'Railgate', Vijay Singla, the nephew of the Railway Minister Pawan Kumar Bansal, was caught accepting a bribe of Rs 90 lakh from a Railway Board member, who wanted his help in securing a more lucrative position on the Board. In another significant development, polling to the Karnataka Legislative Assembly took place on Sunday, with poll pundits predicting a win for the Congress, while the ruling Bharatiya Janata Party (BJP) could end up a distant loser.

Cobra stings again
Nearly two months after it alleged that ICICI Bank, HDFC Bank and Axis Bank were involved in money laundering, Cobrapost, an online media firm suggested Monday that several other private and public sector (PSU) banks were involved in a similar exercise.

According to the revelations, 23 banks and insurance companies have been exposed, including State Bank of India, Bank of Baroda, Punjab National Bank, Canara Bank, Indian Bank, Indian Overseas Bank, IDBI Bank, Oriental Bank of Commerce, Dena Bank, Corporation Bank, Allahabad Bank and Central Bank of India.

Among the private sector lot, YES Bank, Dhanlaxmi Bank, Federal Bank, DCB Bank, HDFC Bank, ICICI Bank and Axis Bank and their insurance arms have been named. Life Insurance Corporation of India (LIC), Reliance Life Insurance, Birla Sun Life and Tata AIG are among the insurers who have been named.

The road ahead
So, are the markets factoring in the possibility of an early election? Should you use the upside to exit? What about the banking pack?

"A lot will depend on the outcome of the Karnataka polls. In case the Congress wins with a majority, they may decide to flow with the momentum and hold the general elections earlier in 2013, rather than in 2014. The markets have already factored in this possibility. Infrastructure stocks have already started moving up in the hope of higher spending and projects getting requisite clearances," said A K Prabhakar, senior vice-president (equity research), Anand Rathi Financial Services.

The ruling party (at the Centre) will be silent till the Karnataka election results are out, says Kishor Ostwal, chairman and managing director, CNI Research. He believes a positive outcome from Karnataka, coupled with some other states (positive results), will give the party enough confidence to go ahead with announcing the elections by the end of this year.

"The markets factored in the possibility of an early election when the Dravida Munnettra Kazhagam pulled out of the coalition. Right now, it's more of a prestige issue for the Congress. However, I think they will limp through the next one year and complete the tenure. The mere announcement of when the elections will be held is good enough to drive the markets higher as markets like certainty. One should stay invested for now," said Arun Kejriwal, founder, Kejriwal Research and Investment Services.

As regards the banking pack, Gautam Sinha, vice-president - equity strategy and products, Motilal Oswal Securities, says they have cut exposure to banks but are not underweight on the sector yet.