What will happen after exit polls?

Too Many Moving Parts

Monday morning on Dalal Street will not fade away easily from our memories. It was the highest single day absolute upmove in the last 10 years. Nifty witnessed a ferocious 3.7% upmove while Mid Cap and Small Cap index gained nearly 4%. The previous one was on 18^th May 2009, when Nifty hit 20% upper circuit on the election result day when UPA came to power.

In 2004, the mandate was fractured for UPA and we had two painful sessions on 14^th May and 17^th May each, when Nifty lost 20% in a course of those two sessions. 2014 was comparatively subtle but the anti-incumbency had played out before the election result day. Still Nifty bounced 4% during the day finally to settle just 1% in green.

Clearly, this defies the fact that elections do not have an impact on the market. They have. Any disappointment or otherwise will have a sharp impact. But should exit polls have the same impact. Not sure. Put in simple words, in this election you can tell the direction but not the extent of the seat tally (like implied volatility which tells the magnitude but not the direction). So, the number ranging from 270 – 350 needs to be seen with more than a pinch of salt. But sentiments rule over sense, so we saw market doing what it did. There are too many moving parts right here;

• Exit polls state the direction and not the number. Any precision of number is just a matter of chance. The methodology through which it is done is very important. Also, the sample size and sample quality is of utmost importance. In a country like India, where demographics change every few hundred kilometers it is difficult to do this exercise.

• Also, the vote share has nothing to do with the seats won. For instance in 2009 with a total votes share of nearly 18.8% BJP got 116 seats; while in 2014 with 19.5% vote share Congress got 44 seats. So, it vote share is not going to be a correct way to predict.

• Also, in case of crucial states like West Bengal, Tamil Nadu and U.P. the exit poll results have huge variance among one another.

• In this election, the move has brought us to life time high in terms of Nifty levels, so logically markets should be euphoric. But euphoria means strong upmove in Midcap and Smallcap stocks as well. But with these indices 20%-25% below all-time highs, it is clearly not a euphoric market.

• Infact, the extent of polarization in Nifty is constantly increasing as top 10 stocks continue to gather more weight, nearly 60% now. The institutional holdings in the top stocks is constantly rising. FII holding in the top 10 names is at the highest level since 2009 at nearly 60%, while MFs hold them at 58% of their total holding in these names. This makes it clear that uncertainty, slowing growth, rising allocation to ETFs and continued liquidity is what is playing in the market.

• The result season for the fourth quarter has been a real big disappointment as we saw many companies coming out with weak numbers. This is clearly reflected in the growth numbers as well.

• The problems with NBFCs and defaulting corporates still persist. Clearly, resolution of the troubled corporates and in-turn the troubled NBFCs is a priority. The liquidity in the system also needs to be brought back to get the wheels of economy moving.

• International trade wars and trouble are still around us. Any uncanny move there can seriously hurt the sentiments.

So, as we wait for Thursday numbers to unfold, let’s keep all these moving parts at the back of our mind.

Happy Trading.

Cheers!!!