While political analysts are busy in analysing publicly the fall out of Janata Dal-United parting ways with National Democratic Alliance, marketmen are quietly working out on strategies to be adopted during the pre-election trend.

As we are in the last leg of this five-year term of the UPA-II Government and preparations for 2014 elections have started, one thing is sure that volatility at the bourses will take centre stage on account of political drama.

The political temperature has been on the rise as the Congress-led UPA is struggling to shake off corruption allegations, revitalise economy and enact a stalled legislative agenda.

One thing the equity market hates the most is uncertainty.

With the ruling party losing ground and the main opposition party not gaining much, 2014 elections could see an extremely fractured mandate, fear market analysts.

According to Citigroup study, the lead-in year to a General Election (1996, 2004, 2009) is a big one for the markets. "They have moved materially (16 per cent, 82 per cent, and negative 30 per cent), very differently to the prior 4-year averages (two lower, one higher)...", the report added.

It is clearly the last lap push for the politician, but with a 14 per cent (annualised return) lead in over 2009-13 (against average 27 per cent) – will it be a sprint year for the market this time too, Citigroup analysts Aditya Narain and Jitender Tokas asked.

A Morgan Stanley, which conducted a 15th India annual summit recently, said, investor sentiment remains 'hesitant at best' due to fear of tapering off easy liquidity and on brewing domestic political uncertainty.

"India seems to be at the crossroads of an attractive long-term story, a great micro story and near term challenges," Morgan Stanley said after the 3-day event.

Expenditure worry

The Government expenditure and currency (in circulation) generally tend to rise during the election year. The Government subsidies/GDP/growth/Inflation have risen in two of the last three election years, said Citi analysis.

One of the key worries for analysts is the populism measures generally undertaken by ruling parties. According to Credit Suisse estimates, the proposed National Food Security Bill, if implemented, can potentially drive an additional cost of 20-40 basis points of GDP and adversely impact the fiscal deficit situation.

“The best result is that the Government lifts the pace of reforms to reignite growth – because that will be critical to winning elections. Thus, project spending could get a lift in the next six months. The market does not detest elections. Indeed, it tends to trade flat or up ahead of elections. Industrials could be the big beneficiary so watch for performance of mid-caps in that sector,” said Morgan Stanley in its India Election Dossier report published in March.

Trades and investors can watch out for the following events for market and stocks’ direction:

Rupee movement

Monsoon progress

Buy back offer for Hindustan Unilever shareholders from the UK parent begins on Friday.

Q1 advance tax numbers from India Inc

News on disinvestment front, particularly after the successful stake sale of MMTC.

badrinarayanan.ks@thehindu.co.in

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