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Why the markets will remain volatile

May 20, 2014 08:36 IST

If you believe in the old adage of "buy on rumour and sell on news", you should be prepared to book profits soon.

The BJP has registered a historic victory but the market has also celebrated this in style.

There was  profit-booking at higher levels on Friday and there could be more bursts of profit-taking through the coming week as the market discounts the positive surprises.

At the same time, there were many fence-sitters waiting for results and they will be entering now as traders book early-bird profits.

Hence, the market is likely to remain volatile with wide daily high-low ranges. There could be a lot of short-term churn across sectors.

One way to handle such a situation is to continue sitting out until the Budget is announced, or there is a correction, or both.

That requires cold-blooded nerves and a contrarian attitude, given a strong bull market.

Instead, most traders will try to find short-term trends that could turn over quick profits. Here are a few ideas that could work in the short term.

One trend we may see in the short term is a focus on counters owned by groups and entrepreneurs perceived to be close to the BJP and more specifically, close to Modi.

We could also see a rapid realignment of corporate stance as entrepreneurs come to terms with new ministers, once the Cabinet is announced.

There will be a flurry of stock market action as investors get a sense of the BJP road map. Rumours of which tycoon is close to which minister will soon start floating, and those could affect prices in the short term.

The Adani Group has already been a major beneficiary of this mindset, for example. Other groups with large exposures in Gujarat such as Reliance, ADAG, the Tatas, etc, have also seen a certain amount of speculative investment.

At the same time, money could flow out of stocks belonging to groups considered to be close to the Congress, the NCP, or other political parties, which have taken a hammering. Playing rumours or "hunches" is a difficult art to master but it can be lucrative.

In the longer term, the construction story seems attractive regardless of the size and shape of the new Cabinet.

The industry has taken a beating as infrastructure activity has stalled due to tardy clearances and land acquisition issues. Sluggish real estate demand and development has also taken a toll on construction.

These sectors are guaranteed areas of focus. If Modi can bring his dynamism to bear, there could be a speeding up of clearances.

If sentiment improves, there should also be a pick-up in demand for real estate. Financing should not be a problem now, given a number of new investors jumping in.

There are many listed construction companies with decent track records. Following from that, there could be some revival in cement and steel demand since the offtake of those commodities is bound to rise. Again, there are plenty of listed companies in both sectors.

Another area, which any new government will have to address, is energy pricing and subsidy. It may be noted that Gujarat has excellent power and the best gas distribution system in India.

Gas is delivered to LNG terminals and then piped into homes as well as used for transport.

It is not accidental that Gujarat has reasonably high tariffs for power, and for piped gas.

If Modi can rationalise the central subsidy policy in these areas, the dynamics of the entire energy sector could change for the better.

There has already been some speculative action in power stocks and, of course, the revised gas price under the Rangarajan formula has pushed up valuations in oil and gas. This could certainly be an area to watch.

Devangshu Datta in New Delhi