It takes market about one week after poll results to revert to pre-election levels, says JPMorgan

JP Morgan suggests derivatives strategies for post-election volatility normalisation in Indian equities. Historically, post-election periods experience volatility normalisation, it says,

Pranati Deva
Published5 Jun 2024, 04:44 PM IST
JP Morgan suggests derivatives strategies for post-election volatility normalisation in Indian equities. Historically, post-election periods experience volatility normalisation, it says,
JP Morgan suggests derivatives strategies for post-election volatility normalisation in Indian equities. Historically, post-election periods experience volatility normalisation, it says,

Now that the Lok Sabha elections are over, the ruling National Democratic Alliance (NDA), led by Prime Minister Narendra Modi, is poised to form the government for the third time. However, the NDA’s performance did not align with most exit poll forecasts and was lower than the decisive mandates secured in the 2014 and 2019 polls, both for the coalition and the Bharatiya Janata Party (BJP) itself. Whereas, the opposition alliance, I.N.D.I.A., has surpassed exit poll forecasts.

Post the results, the Indian markets witnessed an almost 6 percent decline on June 4. However, it recovered over 3 percent in today's deals.

Read here: Nifty 50, Sensex rebound sharply; investors earn 13 lakh crore in a day

Going ahead, global brokerage house JP Morgan expects continued choppiness in the Indian markets over the next few days. Largecaps and defensives like staples could be in focus, it predicted.

"Recent commentary from a few Consumer Staples companies suggests rural demand recovery is picking up and growth will come back in FY25. IMD forecasts an above-normal monsoon and raw material pressures are also abating, which are supportive to margins. Valuations appear reasonable for the sector, trading at 45x on a forward PE basis, near 5-year average levels," it explained.

Meanwhile, the brokerage remains neutral on the consumer staples sector and prefers HUL, Dabur, Colgate and Nestle.

Read here: CLSA reshuffles India portfolio post election results; drops L&T, adds HCL Tech

Apart from the FMCG space, the brokerage is also overweight on:

Financials - ICICI Bank, Kotak Bank, State Bank of India, Bank of Baroda, LIC Housing Finance, Shriram Finance, HDFC AMC, ICICI Prudential, and ICICI Lombard

Autos - Bajaj Auto, Mahindra & Mahindra, Ashok Leyland, Exide, and Samvardhana Motherson

Real Estate - Godrej Properties, and Prestige Estates

Healthcare - Mankind Pharma, Abbott India, Sun Pharma, Max Healthcare, and Rainbow Hospitals

Meanwhile, the brokerage is underweight on IT and materials.

Read here: Sagar Doshi of Nuvama recommends these three stocks today

Derivatives strategies: Positioning for post-election volatility normalisation

JP Morgan expects a post-election normalisation of implied volatility in Indian equities, historically reverting to pre-election levels in about a week. However, the potential resurgence of foreign investor participation, following significant outflows in May, presents a risk to this outlook, it noted.

Increased foreign participation may sustain higher-than-usual realised volatility, potentially delaying volatility normalisation. JP suggests positioning for potential spot price increases and volatility declines by buying Nifty call spreads funded by selling puts.

The brokerage informed that historically, post-election periods have experienced a normalisation of volatility.

Read here: Persistent, Coforge to HCL Tech: Why are IT stocks skyrocketing?

Following the surge in volatility due to BJP's narrower-than-expected lead, the India VIX index reached 26.7 points as of June 4, 2024, aligning more closely with levels observed on past election result days (2009: 52 points, 2014: 24.3 points, 2019: 19.4 points). Analysis of the last three elections indicates that it typically takes about one week for implied volatility to revert to pre-election levels. The current level of 26.7 points in the India VIX index is higher than one-month realised volatility for more than 96%/93% of the time since 2000/2020, it stated.

It further noted that among major global indices, trend-following strategies on the Nifty index have historically delivered the highest risk-adjusted returns. This performance is supported by favorable industrial and fiscal policies, demographic dividends, and rising wealth levels.

Empirical evidence suggests that bullish options strategies, such as buying calls, provide an efficient way to replicate the payoff of long-only trend-following strategies. The brokerage recommends investors consider building long positions to position for a potential up-trend in the Nifty.

Read here: Banking may outperform; Nifty could reach 23,500 by December end, says Trivesh D of Tradejini

"Our preferred strategy is to buy Nifty 27Jun24 23000-24000 call spread funded by selling 27Jun24 20000 put on the Nifty index. This preference is based on our expectation that implied volatility will further normalize in the coming days, which benefits the mark-to-market performance of the proposed call spread collar," it recommended.

Running a coalition government is a tightrope walk and balance is the key

The brokerage further pointed out that BJP has successfully run a coalition government from 1999-2004 and 2014-2024. Note, in the 2004 election when a Congress-led government came in with support from the left party, markets were worried about an unstable coalition. Benchmark indices hit lower levels post the result, but within six months markets had recouped all losses and staged one of the biggest bull runs up to 2007 led by strong economic momentum. 

Read here: Avoid ‘narrative’ stocks, focus on fundamentals, says Kotak Institutional post election results

Historically, the Nifty has delivered +9 percent/+8 percent in the 3/6 months post the general elections since 1991, showing that in the past a correction or dip has typically ended up as a buying opportunity over the longer term, it highlighted.

Its Nifty-50 year-end target remains 22,000.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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First Published:5 Jun 2024, 04:44 PM IST
HomeMarketsStock MarketsIt takes market about one week after poll results to revert to pre-election levels, says JPMorgan

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