Foreigners Most Short on India Stocks Since 2012 on Poll Jitters

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Foreign investors are the most pessimistic in over a decade on Indian stocks amid speculation over Prime Minister Narendra Modi’s party winning fewer seats in the ongoing national elections than previously estimated.

Net short positions — measured as the difference between the number of index futures contracts on which global funds are long to those on which they hold a short position — surged to 213,224 contracts, data compiled by Bloomberg showed. The gap is the widest since data going back to 2012.

The bearish positions in the derivatives market have come at a time when overseas investors have pulled out about $4 billion from local stocks since early April, reflecting a cautious outlook about the outcome of the elections.

That happened as a dip in voter turnout during the recent phases of polling spurred some speculation that a less decisive performance by Modi may hamper his ability to carry out policy reforms, including boosting infrastructure and manufacturing.

“What is not priced in is disruption, which could lead to a sharp and swift correction in the Nifty Index, similar to what we saw in 2004,” strategists led by Frank Benzimra and Rajat Agarwal at Societe Generale SA wrote in a note on Wednesday.

India concluded the fourth phase of voting in its marathon elections on Monday with the seven-phase polling to be concluded on June 1.

Modi is still widely expected to secure a third successive five-year term with the leader having predicted that his Bharatiya Janata Party and its allies will win more than 400 of the 543 seats up for grabs in the lower house of parliament.

The dip in voter turnout has raised concerns about the BJP’s support. While there are no definite reasons for the slide, analysts and poll watchers ascribe the trend to several factors including an ongoing heat wave across the country and the lack of an overarching emotive issue to rally voters.

Sanford C. Bernstein strategists expect Modi’s party “to sail through - with some possibility of repeating 2019 or even going slightly above” despite concerns over muted voter turnout.

Still, investor anxiety is reflected in the so-called fear gauge, which measures likely market swings over the next 30 days.

Implied volatility for options expiring June 27 — the closest monthly expiry following the counting of the votes on June 4 — jumped to over 20% on Tuesday from less than 15% when polling began on April 19, data compiled by Bloomberg show.

Indian equities have underperformed their Asian peers so far this quarter amid concerns over their rich valuations at more than 19 times one-year forward earnings and a recovery in Chinese equities.

--With assistance from Ashutosh Joshi and Abhishek Vishnoi.

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