Exclusive: Are markets factoring in the possibility of early elections?

Railway Board bribery controversy has threatened to shorten the UPA's tenure at the Centre. Cobrapost expose on money laundering by banks also dented sentiment

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

Dubbed as the “Railgate”, Vijay Singla, the nephew of the Railway Minister – Pawan Kumar Bansal – was caught accepting a bribe of Rs 90-lakh from 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

After nearly two months when it alleged that ICICI Bank, HDFC Bank and Axis Bank are involved in money laundering, Cobrapost, an online media firm suggested Monday that several other private and public sector (PSU) banks are involved in a similar exercise.

As per today’s revelations, 23 banks and insurance companies have been exposed, including State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), Canara Bank, Indian Bank, Indian Overseas Bank, IDBI Bank, Oriental Bank of Commerce (OBC), Dena Bank, Corporation Bank, Allahabad Bank, 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 allies have been named. LIC of India, Reliance Life Insurance and 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 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. The infrastructure stocks have already started moving up in the hope of higher spending and the 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, points out Kishor Ostwal, CMD, CNI Research. He believes that a positive outcome from Karnataka coupled with a couple of other states (positive results) will give the party enough confidence to go ahead with announcing the election by the end of this year,” observed.

“The markets factored in the possibility of an early election when the Dravida Munnettra Kazhagam (DMK) 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 is good enough to drive the markets higher as markets like certainty. One should stay invested for now,” Arun Kejriwal, Founder, Kejriwal Research and Investment Services said.

As regards the banking pack, Gautam Sinha, VP - Equity Strategy & Product, Motilal Oswal Securities says that they have cut exposure to banks but are not underweight on the sector yet.