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Be selective...

May 10, 2004

It's not just the politicians that are suffering the political fever. Investors too have been witnessing the heat on the bourses over the last three weeks with every election phase throwing up a tide turning political equation, at least that's what the market volatility indicates. The chart below shows how have the indices have behaved before and after each election phase. And looking at this, it can be concluded that indeed, polls do (make one) tic.

Let us look at the market behaviour during the poll season. The indices witnessed weakness a couple of days before the first phase of elections, even overshadowing the robust March quarter corporate numbers. However, investors re-entered the markets on the back of a favourable scenario for the ruling coalition that emerged from the first exit poll results, as it signified the continuation of the current pace of reforms being seen in the country. However, markets received a big jolt post the second phase of elections, which saw the political equations pointing towards a hung parliament. This sent the indices in a dizzy as the benchmark indices crashed almost 4% in a single day on across the board selling. While we are trying to justify market reactions, what we are highlighting is the volatility.

Then, while the markets were trying to find a footing, the derivatives settlement and disappointing results by FMCG major, Hinistan Unilever (HLL), took further toll in the last couple of days in April. However, it was the opinion polls on May 4, which indicated a favourable position for the ruling government post the third phase of elections that made the indices once again move into forward gear.

However, at this point, taking cues from global developments like strengthening crude prices, the already weakening commodity cycle, the risk of rising interest rates in key economies and the final phase of elections due on Tuesday (May 10), investors opted to take some money off the table on Friday last week.

Investors must note that stock market behavior, like the one being witnessed in recent times, is largely a temporary phenomenon and merely the act of opportunists at work. These tend to take advantage of investor sentiments, which are, unfortunately, influenced more by rumours than fundamentals, to make a quick buck.

In these volatile times, retail investors should exercise caution and stagger their investment decision over a period of time. Timing the market may not be a wise move in these times. Though the long-term prospects of the economy are strong, it is wise to be selective when it comes to stock selection. If investors do not have the stock selection skill, it is better to invest in a credible mutual fund through a systematic investment plan. Always, look at the downside before the upside.

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