Exciting times on Dalal Street! Markets started the election results announcement week with a bang – Record highs, the best trading day in 40 months or almost 3 years, Nifty Bank Index crossed the key 51,000 mark and volatility slumped 20%. If you think ’tis all high drama, that’s exactly how the markets closed on the eve of what is decidedly the biggest day for democracy- The election results are set to be announced in some hours.

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Exit Polls have signalled a thumping victory for the BJP-led NDA. So the question is, will it be a hat trick for Prime Minister Modi or does a twist in the tale await India? Most market players seem to be following the Exit Poll and the sharp 20% drop in the VIX or the Volatility Index is no doubt an indication that perhaps the Street is pricing in a win for Modi scenario.

Near-term volatility but long-term stable

However, that said Siddhartha Khemka, Head of Retail Research, Broking and Distribution at Motilal Oswal Financial Services does not rule out “some volatility on the day of the results declaration and it could be there in the short-term. But I feel in the case of a scenario where BJP garners more than 330 seats, there might be an uptick but might also see profit-booking eventually. The next trigger would be Govt formation and Budget. The growth momentum is a key driving factor for investment in India”

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In fact, the current Open Interest buildup in the 24000 Call may highlight that it is a neck and neck tussle on the markets but a fair bit of gains are perhaps priced in, So valuation-wise are the Indian markets stretched? Khemka explained that the “Nifty valuations are marginally above the long-term average. And with earnings growth continuing we see that valuations could continue from here on. So, around 20 times on one-year forward, Nifty PE is marginally above the 19-19.5 10-year average and is not at a significant premium. For this financial year, we see similar kinds of returns one can expect in this financial year from the Nifty, about 15-16% returns can be expected to take Nifty to about 24,500 But these are all projections at the current juncture.

FIIs Vs DIIs: Tracking fund flows

FIIs have been selling for the markets for the past one month or so. In fact, as per research by the Financial Express Online team, Indian equity markets experienced the highest outflows in Asia, with foreign institutional investors (FIIs) withdrawing a substantial $2.89 billion, the biggest outflow since January.

Most market players, however, see it as a case of profit booking and conserving cash in a bid to realign portfolios once the new Government comes to power. The domestic investment or DII buying in contrast is also seen as offering a significant cushion for our markets. Deven Choksey, managing director of DRChoksey FinServ outlined how “the domestic flow of money is not going to be affected. On the contrary, it may inch even higher and will remain steady in any case because economic fundamentals are strong. Government spending is not going to come down. For FIIs, largely the ETF, portfolios, ETF portfolios that are momentum-driven are the ones that have been selling and sitting on cash. Tomorrow if they decide to participate in buying, it will only drive markets higher. I think the prospects of a market attracting the flow of money is always going to be higher and not less.”

Nifty run-up likely over 6 months?

That brings us to the key point, how much can the markets run up in the current scenario? Are there any hints from history? Kishor Ostwal, CMD, CNI Research compared the market situation now and the way indices panned out in 2014. “The leverage position in 2014 was nil and today also there is almost nil leveraged position. Many investors have taken cash in books and reduced their positions substantially. So all this money will come back after June 4. In 2014, the Nifty scaled up to 9000 levels from 6000 in 3-5 months. In the current situation too I see scope for a similar run-up and it is unlikely to pause before the November -US elections. I don’t see big corrections happening in Indian markets till at least October or November. So the market should run up very fast. My Nifty target in the next 3-6 months would be 25,800.”

What should be your stock market strategy now?

That brings the discussion to the core point now- what should be your strategy now? Should you be buying or selling or just sitting on cash for now? According to Ambareesh Baliga, an Independent market analyst, “it is very difficult to really pinpoint exactly what will play out. I’ve been suggesting to my investors that to be in cash to a certain extent, at least about 20-25% of the portfolio you can keep in cash. When all is said and done, the markets are relatively expensive at this point in time. So in case when the first scenario plays out in the market shoots up to 24,500 levels, then at least you have 75% of your portfolio performing. And in case the markets correct. In the other two scenarios, your 25% of the liquid cash will be more valuable than what it is today. In the long term, I don’t have any doubt that the Indian economy will perform. So it is a good idea to keep some cash in the current scenario.”