Simultaneously, the country’s stock markets witnessed a surge in volatility, echoing the intensity of the electoral fervor. Initial market expectations of a third consecutive term for the NDA government with a clear majority were challenged by lower-than-expected voter turnout, prompting erratic market movements.
As the seventh phase of the general election concludes on June 1, attention will shift to the exit polls, which will be released on the same day, just two days before the final results. Investors and market participants are keenly watching these developments, anticipating their potential impact on market dynamics.
While historical data suggests strong market performance during election years, current market sentiment reflects anticipation and pricing of various electoral outcomes. Analysts emphasise that election results, especially the margin of victory, will significantly shape market dynamics.
Also Read: Lok Sabha Elections 2024 trading strategy: Is Nifty 50 set to scale new heights after poll results?
According to analysts, a decisive win for the incumbent party could trigger an immediate market rally, propelling indices to new heights. Conversely, a narrow victory or loss may induce short-term volatility and corrective measures. Experts suggest that investors should remain vigilant and adjust their strategies in response to unfolding electoral developments.
Now, let’s delve into the expert insights from Mr. Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, who sheds light on potential market responses and strategies amid the ongoing electoral landscape.
Edited excerpts:
What are the likely scenarios for the Lok Sabha election result?
I’m averse to making any polling predictions, however, investors should strap in and prepare for all scenarios during elections. I believe the markets have already priced in the event of the incumbent party being victorious; however, I believe the market behavior would also depend on the margin of victory, i.e., if the incumbent government wins 350+ seats vs. having a lower seat count, which might affect the speed of policymaking and execution during the next 5-year cycle.
How will the Lok Sabha election outcome impact the markets?
If one takes the calendar year returns during election years, the Nifty has always delivered double-digit growth in all periods (2004: 10.7%, 2009: 75.8%, 2014: 31.4%, and 2019: 12.0%). While election results play their part in the short term, in the long term, I am a believer in the India growth story and the market’s ability to deliver 12%–15% returns, especially considering the strong fundamentals and demographic dividend fueling GDP growth and consumption.
In the short term, however, results will sway the markets, which is inevitable. I believe that in the event of the ruling government winning the election with more than 350 seats, we can expect the index to move back to levels of 22,800 and continue with its upward trajectory.
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If the ruling party ends up with a seat count of 300–350, we should expect some short-term volatility and the markets to be range-bound for the next few months before returning to a growth path once the route to government is established. In the event that the government loses its majority, we can expect the markets to correct by 5%–10%. But I will only see this as an opportunity to buy in and ride the growth wave.
My advice to retail investors would be to hold any large positions in the markets and continue with systematic investments. In the long term, this is the most tried-and-trusted strategy.
How is the current election period volatility compared to previous years, particularly in terms of the VIX, and what strategies are institutional investors adopting in response?
Historically, markets have been volatile around the election period, and we’re seeing the same this year as well, with the VIX (Volatility Index) seeing an uptick with a 60% rise in the last one month and reaching 18+ in the last few days.
Also Read: Nifty may hit 24,600 in a year: Jitendra Gohil of Kotak Alternate Asset Managers
However, this is still a more stable market in comparison to the previous election, when VIX reached 26 in 2019 and 37+ in 2014. I see there is some range-bound movement till the results are declared, with FII’s withdrawing in the last few days and in wait-and-watch mode, but DII’s seeing this as a buy-on-dip strategy.
What trading strategies can be employed by investors to maximise returns during volatile periods?
It would be foolish to predict election results, as seasoned investors would remember from two decades ago. For intraday traders, you should consider stop losses at reasonable distances, while at the same time not so close that they are triggered by the exaggerated intraday movements.
For option traders, premiums will be high considering the higher anticipated volatility. Traders can consider direction-agnostic strategies such as butterflies, with the additional protection of a call buy on the upside or a put buy on the downside.
Also Read: Lok Sabha elections 2024: Will the results cast a shadow on your mutual fund portfolio?
This will ensure further protection from any gap openings in the next few days. Traders can also opt for long strangles or straddles to have a higher chance of profiting from the volatility. However, one needs to be extremely agile to ensure one can book profits.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 31 May 2024, 07:30 PM IST
