Markets at new high: Investors should exercise caution

Markets touched a lifetime high on Friday closing with a significant gain of around three per cent. The BSE Sensex surged 650 points to breach the crucial 23,000- level for the first time and settling at a record high of 22,994.23. We have two major events due in less than seven days and investors need to keep them in mind before jumping the gun.

Friday's euphoria is a reflection of leaked information on the possible outcome of the general elections from TV channels exit polls, which will be telecast on Monday. How reliable such information would be is always debatable and cannot be relied upon in finality.

Markets were abuzz that the Bharatiya Janata Party ( BJP) would comfortably cross the 220 mark on its own and probably add some more number to the final tally. With expectations of a stable government, markets were powered by NaMo power to stratospheric levels. Sharebrokers attributed the surge to BJP prime ministerial candidate and Gujarat chief minister Narendra Modi exuding optimism in an interview on Thursday that the party will get a clear majority.

The final round of voting ends on Monday and exit polls would begin trickling in immediately. There would be surprises, pleasant or unpleasant, but plenty of action could emerge on Tuesday in markets. Actual results would be out on Friday, May16, and time and again one has seen the slip between the cup and the lip.

I am not advocating any kind of change in the way people would vote but suggesting caution.

Markets are at a life time high. Expectations are bordering on a massive victory for the BJP- led National Democratic Alliance ( NDA) and markets have factored that in the prices.

Possibility of any upside move from here on the outcome being in favour of NDA is limited. The only upside that could happen is if the BJP forms a majority on its own. On the downside, the NDA failing to get a majority would trigger selling in markets and this could worsen if the BJP on its own gets just around 200 seats.

The Nifty closed at 6,858.80 points. The star performer on the Sensex was the banking index with the BSEBANKEX closing at 15,721.6 points. It is expected that the entire business climate will undergo a sea change and the biggest concern of stressed assets would be addressed with change in government. This optimism saw both private and public sector banks perform.

The economy is in a bad shape. Economic data are not showing the optimism reflected in markets. Benchmark indices like the Sensex and Nifty are trading at 15- 16 times the expected earnings for FY14- 15. Companies listed on these bourses are expected to grow at more than 20 per cent.

Investors should be cautious at these levels and not get carried away. Investing in the indices at these euphoric levels with two mega events in just the second and fifty trading day is fraught with danger.

With retail not yet fully convinced, it makes sense to ride out the week and then take a call.

(The writer is an investment analyst)

Courtesy: Mail Today