Bulls bound out smelling hope in political mess

Never-say-die bulls regained control despite the uncertainty and suspense over the election verdict and formation of the new government.

Never-say-die bulls regained control despite the uncertainty and suspense over the election verdict and formation of the new government. Though the BSE Sensex shrugged off uncertainties surrounding the poll verdict and ended at its best close in more than seven months on Friday,the street is expecting volatility to rule the roost in the run up to the formation of the new government.

Snapping a two-day fall,stocks rose 2.5 per cent,or 300.51 points,to 12,173.42,on Friday,lifting the market to a tenth successive weekly gain on diminishing political risk especially the prospects for the Third Front and signs of economic recovery. The market was bolstered by hopes one of the main two national coalitions will be able to form the next government after general election results are released on Saturday. Strong Asian markets and comments of RBI Governor D Subbarao that signs of recovery have emerged in the economy boosted the market morale. The 50-share NSE Nifty index ended the day up 2.2 per cent at 3,671.65 points.

Foreign funds continued their buying spree and invested another Rs 984 crore on Friday,taking the net investments in May to Rs 8,065 crore. The market is likely to be volatile during the period of formation of the government after the announcement of results. However,once the government is formed,the market will start focusing on fundamentals.

If one of the coalitions led by the Congress or the BJP gets more than 200 seats and other party gets significantly less difference of more than 50 ,then the message would be clear that the leading party should form the government and smaller parties would support the leading party. The government would be considered to be stable and market could move up by about 5 per cent or so, said Avinash Gupta,Assistant Vice President,Bonanza Portfolio.

The market seems to be factoring in a UPA or an NDA-led government. A Third Front government appears to have been priced out. If the exit polls are accurate,both the UPA and NDA would increase their seats in Parliament at the expense of the Left and other regional parties, said vice-president and India economist,Goldman Sachs,Tushar Poddar.

If the government is formed without the support of the Congress or the BJP,the government would be formed by a large number of small parties 8212; say the Third Front. The market would perceive such a government to be weak and unstable. The market could go down by more than 10 per cent,but this is highly unlikely, Gupta said.

The market has soared more than 50 per cent from a 2009 low in early March,as foreign funds pumped in about 1.5 billion in April and more than 1.8 billion in April.

WHAT ANALYSTS SAY

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After announcement of election results,there is a good enough likelihood that markets might initially give a knee-jerk reaction and correct but Sensex would not tank below 11,625 and in the worst case not below 11,430. It could then retrace the fall based on expectation of market-friendly government formation and in the process the earlier top of 12,256 may be breached.

Adwait Sapre,HDFC Securities

Markets will react positively if they see a stable government with a positive mandate for reforms. A government with either BJP or Congress as a lead party and with high share in coalition is the ideal one. On the third front,one will have to see the constituents and the support and markets will be cautious. If present government comes to power,it will be positive as continuity will be maintained.

Rajat Rajgarhia,Motilal Oswal

The market seems to be factoring in a UPA or an NDA-led government. A third front government appears to have been priced out.

Tushar Poddar,Goldman Sachs