WHAT’S GOING ON?
The results of the world’s largest election will be announced on Friday, and while it has been profitable to ‘buy on the rumour’, it may already be time to ‘sell on the news’.
WHY DOES THIS MATTER?
With the business-friendly candidate looking likely to win, this could herald a new era for one of the world’s fastest growing economies, impacting competition with, or revenues for, US or European firms.
Of particular importance for global investors is that the majority of the recent buying of Indian stocks has been carried out by foreign investors i.e. outside of India itself. Foreign ownership of companies listed on the Indian stock exchange has reached a record 22%. Worryingly, domestic investors have already started selling.
WHAT’S THE RISK?
The ‘best case scenario has already been priced in, with preliminary polls indicating the business friendly candidate Modi will win the election. The Indian stock market has now outperformed the Emerging Market index by more than 7% year to date. However, these polls have historically proved inaccurate and there is still a chance for disappointment.
Further upside is limited because, while there is likely to be election excitement, when this dies down, it will take time for reforms to be implimented and impact corporate profitability.
Rumours have circulated that local brokerage firms have requested additional capital to be held aside when investments have been bought, to be able to offset bigger losses and implying a higher level of volatility is expected in the markets.
WHAT TO DO?
The key number to watch for is 272 – the number of seats that need to be won for a majority in government. Anything below 240 would be taken badly by investors. Nevertheless, it may be wiser not to wait for the results and already reallocate capital closer to home to generate returns with less risk taken.