MARKETS PREPARING FOR POLL D-DAY

With Indian stock markets reaching dizzying heights on hopes of a strong and stable government after polls, investors have started adding 'defensive' stocks to shock-proof their portfolios ahead of election results on May 16. At the same time, regulator Sebi, stock exchanges and market intermediaries are also working to ring-fence the systems and infrastructure from any sudden volatility on the results day, or around that date. Officials said 'mock stress tests' have been conducted at exchanges under supervision of Sebi to ensure that the markets are ready to withstand any shocks that may arise out of sudden increase in volumes. The preparations are being done while keeping in mind the experience of May 18, 2009 -the day when results of last Lok Sabha polls were announced and the markets gained so much that trading had to be halted. That date is still known as 'Magic Monday' in stock market as the benchmark index Sensex posted its biggest ever gain of over 2,100 points in just one-minute trade after investors were enthused by a decisive verdict in the then concluded general elections. However, the gains were limited to a few investors on that date as trading could not continue for the day. The experience was another extreme on May 17, 2004, soon after the announcement of 2004 Lok Sabha elections, the markets witnessed the worst-ever bloodbath on concerns of uncertainty over the economic reforms as the then NDA government was voted out of power. That time also, the exchanges were forced to suspend trading twice to contain volatility, while Rs 1,24,000 crore worth investor wealth got wiped out despite all efforts to contain the losses. The officials said all necessary groundwork has been done to prepare for any eventuality on the results day this time, while there have also been requests from some quarters to extend the trading beyond the stipulated 3.30 pm on May 16, which is a Friday. Besides, there are also demands to conduct trading on the next day, although markets are normally closed on Saturdays and Sundays. A final decision is yet to be taken on additional trading hours, a senior official said, adding that so far Sebi has not been inclined to do so as there have been no precedents and such a move may be construed as interfering in the normal market making activities.
The Sensex has already galloped over 7 per cent in this calendar year to 22,688.07, with capital goods, banking, consumer durables and automobile firms' shares clocking double-digit gains. However, there is also a possibility of a hard-landing on May 16 if the outcome differs from expectations of a result favourable to the coming of a stable government. In past one month or so, index for a defensive sector like healthcare has surged 3.5 per cent dwarfing Sensex's 2.8 per cent gain -indicating that smart money in markets is ring-fencing itself. 
Unpredictability of election outcomes in India, given fragmented polity and dynamic voter base, coupled with the fact that opinion polls went wrong in the last two national elections (2004, 2009) remains an overhang. "...In the run up to the outcome of general elections on May 16, the next few trading sessions are likely to be very volatile," according to research conducted by Aditya Birla Money, which has advised clients a mix of cyclical and defensive stocks. Listing out a possible scenario, foreign financial major Morgan Stanley in the second week of this month said if the elections produce a fragmented coalition government, the equity market could revert to quality stocks, and "technology and pharmaceuticals could be the major outperformers" and the INR could lose more than 10 per cent. "Volatility around elections is almost guaranteed. With the markets turning more optimistic about the election outcomes and the importance of elections to future growth and macro stability, investors may seek to adjust their portfolios for likely election outcomes," it added. Morgan Stanley's model portfolio has a combined 30 per cent weightage for healthcare and IT stocks. The scope for escape is little in mid-cap and small-cap shares that have risen faster than blue-chip stocks that typically comprise Sensex and Nifty indices, experts say.
The index-based market-wide circuit breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15% and 20%. These circuit breakers when triggered bring about a coordinated trading halt in all equity and equity derivative markets nationwide. The market-wide circuit breakers are triggered by movement of either the BSE Sensex or the NSE CNX Nifty, whichever is breached earlier. "Markets have run up to great heights in the past two months. We expect the bullishness to continue. There are certain sectors which have participated in the rally and those which have not. For the bullishness to continue further, we expect a sector-wise rotation to happen. Hence, we are generating a sell call on certain over-heated stocks in the sectors, which have run up the most,"said Asit C Mehta of Investment Intermediates. It has advised its clients to book profits in a minimum 20 per cent and a maximum 40 per cent from holdings in a list containing Apollo Tyres, Adani Enterprises, HPCL and Crompton Greaves. Prabhudas Lilladher's R Sreesankar, who heads institutional equities, says the equity market behaviour leaves very little margin of error as the market seems to have zeroed in on one person heading the new government. "In the event of a decisive government failing to materialise, there is scope for huge disappointment and this could lead to the market correcting and the Nifty could come down to a lower range of 5700-6200 levels," he added in a report.