Markets on election results day: How investors are preparing to trade

The benchmark Sensex and Nifty have gained 3.1% this week in anticipation that the ruling NDA govt will retain power with a comfortable majority as indicated by most exit polls

The results of 17th Lok Sabha elections will be declared on Thursday. Counting would start from 8am on and clear trends will emerge during the second half of the day. The benchmark Sensex and Nifty have gained 3.1 per cent this week in anticipation that the ruling National Democratic Alliance (NDA) government will retain power with a comfortable majority as indicated by most exit polls. Here is a primer on what to expect in Thursday’s trade:

How will the markets open?

Analysts say the markets could open sharply higher or lower depending on the early trends. Also, until a clear trend emerges, stocks, in high-beta sectors like banking, could see huge swings. The benchmark Nifty has swung an average 8.8 per cent on previous five result days. Thursday could be no different if the final results spring any surprise.

How will the markets react if the election results mirror exit polls?

Experts say the market has largely priced in an NDA victory and don’t rule out a further uptick if the ruling coalition, indeed gets a majority. Analysts say the Nifty could breach 12,000, a 2.2 per cent rise from current levels.

What if NDA does not form the government?

The NDA not returning to power will be a jolt to the market and stocks will see a knee-jerk reaction. According to market experts, the benchmark indices could correct between 5 per cent and 10 per cent in case the NDA falls short of the majority. Experts say the extent of fall will depend on the composition of seats. They say a higher tally for the Congress won’t be too much negative, but the possibility of a third-front government could lead to a sharp sell-off.

Do current valuations support another big rally like the one seen on Monday?

Analysts point out that the market is currently trading above its long-term averages. The Nifty is trading at about 18 times its one-year forward earnings estimate compared to the 10-year average of 16 times. However, markets can overshoot valuations in the near-term if the election results are favourable.

Will foreign investor sentiment improve if NDA returns?

In a note, UBS has said most overseas investors are factoring in a Modi win. This week, foreign portfolio investors (FPIs) were seen stepping up their buying ahead of the results. "If the results are satisfactory we could see a surge in FPI flows in the near-term," say experts. This will be on account of increasing country allocation for India in hopes of economic reforms and improvement in corporate earnings.

How are traders positioning for the day of election results?

Traders have mounted bets on far-out-of-the-money Nifty strikes of 12,500 and even 13,000. The open interest -- which is the number of outstanding contracts – is 1.69 million in 12,000 strike price and 1.68 million in 12,500 strike price. Further, even a 'call' option of 13,000 strike price -- which is significantly higher than current levels -- has started seeing sizeable build-up.

Do elections have any long term impact on markets?

Market experts say elections typically don’t have a long-term bearing on the markets. However, like any big event, they lead to a lot of volatility in the short term. But once the event is over, more fundamental issues like corporate earnings growth, economic outlook, and interest rates trajectory determine markets performance.

Compiled by Sundar Sethuraman