Last week Crude Oil prices plummetted, and our markets celebrated the news with style. The smart recovery may be shortlived, as the markets are likely to be hit by a political turmoil soon.
What unfolded as a trust vote on the 'Nuclear Deal' has been converted into a mistrust vote by our selfish politicians. We might see the PM Dr. Manmohan Singh drive to Rashtrapati Bhavan in the evening of 22nd July 2008 to submit his resignation, maybe followed by instalation of Mayawati as the next PM thereafter. Even if the Govt. survives, its functioning is likely to be paralized in the wake of the likely price to be paid to the saviours of the Govt. This does not auger well for the stock markets in the near to medium term i.e. upto the next gerneral elections. Politics will henceforth rule the markets, and we all know the lows to which our politicians can stoop to fulfill their vested interests. In all probability economics is likely to take a backseat.
The uncertainty in the political arena is likely to lead to extreme volatility on the bourses. Even long term investors need to prepare themselves for this eventuality. How can an investor survive this poltical crises/turmoil? Firstly, it is prudent to prune exposure to equity and partly shift to debt. Secondly, improve the liquidity by holding sufficient cash to encash on the ensuing volatility. With BSE at around 13,500 and Nifty at 4,100 (closing prices on 18th July), there is a possibility of short term movements of 15% or more either way: BSE 11,500 or so on the downside and 15,500 on the upside. If the Govt. survives the rise in the markets may be used to partly book profits/ losses. And if the Govt. fails to win the trust vote, the panic reaction should be taken as an opportunity to buy bluechips for long term. Remember: cash is the king in such a situation.
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