Fear gauge shows Dalal Street edgy

Broking houses seek higher margins to deal with volatility

Tighten your seatbelts, it is likely to be a rough ride on Dalal Street from here on.

With the casting of the last ballot in the ongoing national election on Monday, television channels will reveal the findings of their exit polls later in the day, triggering wild speculations on the political permutations and combinations, and jitters in the stock market.

The resultant volatility will test the nerves of equity investors till the real verdict is out on May 16. India VIX, the fear gauge of the stock market, surged on Friday to 37.70, its highest level since July, 2009. The lowest for the index was 13.84 on March 3. A surprise election verdict can knock both shares and the rupee. Equity benchmarks have rallied 8 per cent in the election rally since the end of February, mainly on expectations that the polls will throw up a stable government at the Centre.

On Friday, Sensex sur­ged 650 points – all in a day – on the first hint that the opposition NDA was poised to notch up a comfortable majority. Yet, as the D-day draws near, investors and brokerages are getting increasingly uneasy.

“The market has accounted for the immediate formation of a stable government. The coming week will see volatility with a tussle between those who believe it would be a cake walk and those who believe otherwise,” Ambareesh Ba­l­­iga, managing partner for global wealth management at Edelweiss Securities, wrote in his blog.

Brokerages are taking no chances, fearful of the damage anything short of a decisive victory can cause to investor sentiments. They are apprehensive of a repeat of what happened in 2004 and 2009, when opinion polls went wide off the mark in predicting the outcome of the elections, triggering wild swings in the market that caught most investors off guard.

Some brokerages have raised margin requirements in both equity and derivative segments to deal with the likely volatility after the election results.

ICICI Securities will step up its margin requirements in a phased manner till May 20. “The margin will be increased in both equity and derivative segments, depending on the overall market volatility and stock-specific volatility on a daily basis till May 20,” the brokerage said in a note to clients.

According to Reuters, Kotak Securities has increased margin requirements for retail investors by 10 percentage points to 30 per cent of outstanding exposure, while limiting funding for those trading with borrowed money. KR Choksey and Geojit BNP Paribas have imposed stiffer margin requirements. Sharekhan confirmed having raised margin requirements.

Many brokerages have advised investors not to take undue risk and stay cautious for the week. They said the readings of the exit polls, ​expected to start pouring in later on Monday, need to be taken with a pinch of salt.

“We have been advising investors to be positioned in such a way as to make the most out of the uptrend that may continue after the election results. However, one should be able to protect the portfolio in case the political outcome is not to the market’s liking or if there is a correction in the market. One should have adequate exposure to the export-oriented themes as well as some of the defensive stocks,” said Dipen Shah, head of private client group research at Kotak Securities.

“There are expectations of the BJP-led allies winning the elections and volatility will shoot up as we enter the deciding week. We advise investors to stay cautious and read exit polls with a pinch of salt,” said Rikesh Parikh of Motilal Oswal Financial Services, who said long-term investors should stay put with their portfolios till the poll verdict.

Friday’s 650-point surge pushed Sensex to a new high. Banking, oil and auto sectors, which are expected to see a revival first in case of a turnaround in the domestic economy, have seen healthy buying in this rally.

Infrastructure-related stocks from the power, telecom and capital goods sectors have, however, faced selling pressure, as their fate largely depends on who comes to power at the Centre after the biggest-ever election in the world.

Among the BSE sectoral indices, bankex, consumer durables and oil & gas indices have been the biggest gainers, rising between 3 per cent and 5 per cent over the past 10 sessions, while realty, TECk (which tracks telecom and IT stocks), FMCG, capital goods and power indices have declined between 1 per cent and 3 per cent.

“Expectations are high and the market is pricing in a BJP-led government to come to power, with Narendra Modi as prime minister. However, the outcome of the election has historically been notoriously difficult to forecast,” Nomura India said in a note.

The brokerage believes in case the Modi-led NDA forms the government, it would be a medium-term positive for the economy. “We expect forward-looking financial markets to react positively in this scenario. In the equity market, we expect oil and financial sectors and asset-heavy companies to benefit from the post-election reforms,” it said.

Axis Bank, ONGC, M&M, ICICI Bank, SBI and Reliance Industries have gained between 3 per cent and 7.50 per cent in the past 10 sessions. Bharti Airtel, Sesa-Sterlite, Tata Power, GAIL and L&T were among the stocks that have fallen between 2.5 per cent and 8.5 per cent in the same period.

Edelweiss Securities’ Baliga says the last leg of the election rally should be utilised to book profits. “Though greed could overtake prudence, valuation would get a bit expensive at 16 times FY15, as it would take the next two or three years to achieve a GDP growth of over 8 per cent,” he argued.

amitmudgill@mydigitalfc.com

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