India's election is afraid of flying out of the black swan? Foreign investors are aggressively shorting stock prints, with net short positions reaching a 12-year high

Finance Associated Press

2024-05-15 17:06Published on the official account of Cailianshe under Shanghai Poster Industry Group

Finance Associated Press, May 15 (Editor Liu Rui) Although the Indian election marathon continues, foreign investors' views on the Indian stock market have fallen to the most pessimistic level in more than a decade.

There are fears that a "black swan" may fly out of India's general election - Indian Prime Minister Narendra Modi's Bharatiya Janata Party may win fewer seats than expected.

If this does, it could hamper Modi's ability to push forward with policy reforms in the future. Modi's previous pledges to boost infrastructure and revive manufacturing are also likely to be stymied.

Foreign concerns about stock printing rose to a 12-year high

Global funds' net short positions in Indian equity index futures surged to 213,200 contracts, the highest since 2012, according to data compiled by Bloomberg.

Global funds' net short position in Indian equities reached its highest level since 2012

The short position in the derivatives market comes as overseas investors have withdrawn about $4 billion from the Indian stock market since early April, reflecting a cautious view of the Indian election results.

As a result, Indian equities have underperformed their Asian counterparts so far this quarter, due to somewhat high valuations in Indian equities, forward P/E ratios of more than 19x, and a rally in Chinese equities that have attracted some overseas funds.

Over the past month, India's Nifty Index has edged down 0.37%, while Hong Kong's Hang Seng Index has risen 14.90% over the same period.

Year-to-date comparison of India's Nifty Index (blue) and Hong Kong's Hang Seng Index (yellow).

The ruling party may not win as much as expected

One of the reasons behind foreign worries about the Indian stock market is the recent Indian general election. Voter turnout in India's current general election has fallen compared to the past, leading to speculation that Modi's ruling party may not be able to win a landslide victory.

On Wednesday, a team led by Société Générale strategist Frank Benzimra wrote in a note: "The market has not yet priced in the political turmoil, which could lead to a rapid and sharp correction in India's Nifty index, as we saw in 2004." ”

India's general election lasted a month and a half, starting on April 19 and ending on June 1. The election is divided into seven phases, and as of Monday, India has just concluded voting for the fourth phase.

Judging by both the pre-election polls and the current election, Indian Prime Minister Narendra Modi is almost certain to win the election again and secure his third five-year term.

However, Modi's Bharatiya Janata Party (BJP) may not have as many seats in parliament as expected. There are 543 seats in the lower house of India's parliament, and Modi had optimistically predicted that the BJP and its allies could win more than 400 of those seats.

However, voter turnout in the Indian election has dropped significantly, raising concerns about the Bharatiya Janata Party's support. While there is no clear reason for the BJP's decline, analysts and poll observers attribute the trend to several factors, including the ongoing heat wave across the country and the lack of a major topic that will rally voters.

Bernstein strategists at internationally renowned investment banks expect Modi's party "to get through – with the potential for a repeat of the 2019 election, or even slightly higher, than in 2019," despite concerns about low voter turnout.

However, investor anxiety is already reflected in options implied volatility – the so-called "fear index". Implied volatility for options expiring on June 27 jumped to more than 20% on Tuesday, up from less than 15% at the start of the April 19 poll, according to data compiled by Bloomberg.

(Finance Associated Press, Liu Rui)

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