Three months before elections; should you bet big on stocks?

Updated: Saturday, February 8, 2014, 10:35 [IST]

The most eagerly awaited event for the stock market is likely to be completed in the next 3-4 months. Clearly, the General Elections to form the next Union Government is likely to make or break the market.

In fact, on the day of the election results, select high beta stocks can easily move up or down by 10 or 20 per cent, depending on the outcome.

To bet big, you have to predict the outcome. Let's go with the recent opinion polls that suggest the BJP led NDA could get anywhere between 210-230 seats. If you take the average and say about 220 seats for the BJP led NDA, the market could see this as positive, given that Chandra Babu Naidu's Telugu Desam, independents, Mayawati and possibly Jayalalitha might lend a helping hand to the NDA to reach the magical figure of 272 seats.

Now, anything below 200 seats may not go down well with the markets and they could be jolted, given the difficulty that Narendra Modi may face in wooing other allies, due to ideological differences.

What to bet on?

If a BJP led NDA does form the government, be rest assured that banking, infra, real estate and capital goods stocks would be in a tizzy and software and pharma stocks would be shunned. It's because of hopes that a Narendra Modi government would usher in an era of high economic growth.

It's obvious that people would move away from bellweather stocks, including those from FMCG. Capital goods and infra stocks would be on fire on hopes that the Narendra Modi government would push through economic reforms. You might not get stocks like Voltas, Crompton Greaves, Bharat Heavy and Siemens at the current levels. Similarly for infra stocks like L&T, NCC and IRB Infra.

If you are hopeful on a Narendra Modi led government, also bet big on PSU Banking stocks, most of which are available at very cheap valuations currently. All of them are likely to rally should Modi form the government.

Of course, if you expect a badly hung parliament, then stay with defensives including the likes of ITC, Hindustan Unilever and stocks from the pharma space. Should the markets tank, if the outcome is hung, you might come out unscathed, if you invest in defensives.

If you are not sure of the outcome, then taking a small exposure would be the best bet.

GoodReturns.in