Expect markets to do a poll vault, says BofA

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SummaryEven as the country awaits general elections due next year, investment banking firm..

Even as the country awaits general elections due next year, investment banking firm Bank of America Merrill Lynch (BofA ML) expects assembly polls in five states beginning November this year to impact the trajectory of Indian equities.

BofA ML research finds markets tend to be positive in the run-up to elections, but turn nervous as ones near the actual counting. The outcome of some these assembly elections would determine where Sensex ends in calendar year 2013, says its report.

“While generally assembly elections are relatively less important, we think the assembly elections in November and December to four states (+Mizoram) could be more significant,” BofA ML head of research, Jyotivardhan Jaipuria, said in his research note. Assembly elections kick off on November 25. Analysis shows investors buying six months before polls and selling on the day before results would have seen positive returns in six of the last seven elections.

“Markets do well prior to general elections. Historically, the markets have been positive in the run-up to the elections, but turn nervous as we near the actual counting... the average return has been 15% in six of the last seven elections,” said Jaipuria, adding that equities have given negative returns a month before the result announcement in two of the past three elections.

BofA ML also analysed the six-month performance of various sectors prior to the general elections. “Utilities, auto and energy have outperformed the markets in three out of the last four times,” Jaipuria added. On the other hand, FMCG companies tend to underperform the markets, while rest of the sectors have shown mixed performance, stated the report.

Interestingly, BoFA ML witnessed divergent outcomes when it analysed the performance of the sectors over a period of one year prior to elections. “We find these sectors have behaved differently. Sectors like IT, consumers and pharma have outperformed the markets three of the last four times, whereas utilities has consistently underperformed the markets,” Jaipuria said.

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