The Sensex and Nifty have rallied by over 5% on the last two trading days to close at record high levels of 23,547 and 7013 respectively. The sudden sharp rally in the equity indices have come about on the back of expectations of exit polls showing a comprehensive win for the Modi led NDA in the 2014 general elections, the results of which will be out on the 16th of May.
Indian equities have been a singular outperformer calendar year to date with Sensex and Nifty returning over 11% each. Dow, S&P 500, Nasdaq, Dax, FTSE, Nikkei, Shanghai, Kospi and Hangseng have all been flat to marginally down calendar year to date. Hence the domestic equity rally is largely to do with speculation on polls rather than any strong global market driven rally.
On the fundamental side, the domestic economy is struggling with all indicators pointing to weak growth for fiscal 2014-15. Industrial production is sluggish, manufacturing sector is struggling to stay at growth levels while service sector is still showing contraction. Inflation is sticky at above 8% levels. April 2014 has not seen a relief for car manufacturers with vehicle sales down year on year.
Trade data shows non oil imports down over 20% for April 2014. Corporate results for the last quarter of 2013-14 have not shown broadbased growth and business confidence while better is still very much muted.
RBI is nowhere close to lowering interest rates given inflation and prospects of EL Nino.
The market is highly speculative as seen by the implied volatility of Nifty index options. Implied volatility is at levels of over 40%, well above levels of around 15% seen in April.
Equities could see a correction if the market chooses to take profits on election results coming out as predicted by exit polls. Any adverse election outcome would see markets go into a sharp fall.
Investors worried about markets shooting up post elections and buying now for short term gains would be taking high risk. The levels of stock prices are not reflective of long term fundamentals but short term speculative activity.
It is best for investors to wait for the markets to settle post elections and then look to buy for improvement in economic and corporate fundamentals over a minimum three years period of time.
Speculators who have bought on rally hopes should look to book profits while investors with solidly built portfolios should hold on and not do anything in this market.