Polling is underway for the 16th Lok Sabha elections and the mood is gripping. It is possibly the most exhilarating elections ever in the history of India, poised on ideologies and manifestos. After ten years of two UPA regimes, there suddenly seems to be an anti-incumbency wave in the country. The BJP led NDA has been aggressive in its electoral campaigning with Mr Narendra Modi as its prime ministerial candidate, while the Congress led UPA which is surrounded by allegations of scams, has been defensive. It is showcasing what it has achieved in the last 2 terms. Interestingly the voter turnout has been high this time as compared to 2009; and the urban voters are expecting a change at the centre. The Indian equity markets are also hopeful of BJP led NDA coming to power. But eventually it remains to be seen whether the nation grooves to RaGa tune or sways by NaMo wave.

The outcome of general elections is scheduled on May 16, 2014 and the capital market regulator – Securities and Exchange Board of India (SEBI), stock exchanges and market intermediaries are working to ring-fence the system and infrastructure from any sudden volatility on the results day, or around that date, amid times when the stock markets are scaling highs on the hopes of strong and stable Government at the centre.

So what are the measures likely to be taken?
At present, exchanges are conducting 'mock stress tests' (under supervision of SEBI) to ensure that markets are able to withstand the shocks that may arise suddenly out of increasing volumes. There are also requests from some quarters to increase trading hours beyond the stipulated 3:30 p.m. on May 16, 2014. Besides, there are demands to conduct trading on the next day after election results (i.e. May 17, 2014), which is a Saturday.

So there is groundwork, and precautionary measures have been suggested to prepare for any eventuality at the time of election results.

Why now?
You see, the preparations and suggestions have come as learning from past experience. On May 18, 2009 - the day when results of the last Lok Sabha elections were announced, the markets gained over 2,100 points resulting in circuit breakers being hit twice and leading to a halt in day's trade. Likewise in another extreme instance, on May 17, 2004 soon after the 2004 election results were announced, the markets witnessed worst-ever bloodbath on Dalal Street.

So the preparations and suggestions made are in order to preclude such shocks from occurring again this time.

How are Indian equity markets likely to behave?
The markets are likely to remain volatile as elections are underway and ahead of the outcome of Lok Sabha elections, although the markets are optimistic about the election outcome. A fragmented coalition Government if formed, may lead to the markets remaining shaky.

Notwithstanding the above, the macroeconomic factors such as monsoon and corporate earningswill also pave path for markets. The Indian Meteorological Department (IMD) has already forecasted a below-normal monsoon as a result of an El-Nino effect, which could instil inflationary pressures if food prices escalate. And if that indeed happens, the Reserve Bank of India (RBI) may also keep policy rates elevated and transitional trend reversal ininterest rate regime cannot be ruled out.Investors would also keep an eye on the corporate earnings.Lower than expected earning numbers could hinder the upward path of the markets. So, you see, an El-Nino effect and disappointing corporate earnings could weigh on the Indian equity markets as we head towards the crucial election results. Also while at present the Indian equity markets have largely gone unscathed by the geopolitical tensions between Ukraine and Russia, if crisis brew up further, it could have an impact on global markets.

What should equity investors do?
There is no point speculating on the outcome of general elections and investing in the Indian equity market. The markets have already scaled a new high recently and with the P/E being placed in the stretched zone of 19.0, expecting the markets to only move upwards would be imprudent in the backdrop of domestic macroeconomic yet worries persisting.

PersonalFN is of the view that, entry and exit should be determined by the investment objectives you set and the investment horizon you have. Also following the personalised asset allocation is imperative; because going by speculations and investing in an ad-hoc manner can turn out to be harmful. While investing it would be wise to stagger your investments to mitigate risk, since volatility could persist. While investing in equity mutual funds, PersonalFN recommends one to opt for the SIP (Systematic Investment Plan) mode of investing, as it will enable you to mitigate the volatility through rupee-cost averaging and power your portfolio with the benefit of compounding.

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