Is India ready to witness Black Swan Moment this week……?

The 2000 IT bubble, 2008 market crash, 9/11 and 13/12 terrorist attacks in USA and India is the examples of Black Swan incidents. A very popular writer from finance fertility Nassim Nicholas Taleb had introduced this concept of Black swan in 2007 and has explained this concept in his masterpiece book ‘’ The Black Swan’. The definition of the Black Swan in his opinion is, a rare event or we can say a random event that underlie our lives from best things that can happen to us to the biggest disaster. Their impact is huge; they are nearly impossible to predict; yet after they happen we always try to rationalize them. A rallying cry to ignore the ‘experts’, the Black Swan shows us how to stop trying to predict everything and take advantage of uncertainty.

I am not expert in politics but as quantitative analyst and a fund manager, I thought to share how I am preparing myself for this week and take advantage of this uncertainty.

There is a consensus opinion between many of us and also in my social network that the opposition alliance will be forming a new government in the parliament. That opinion might have been built on our day to day interaction with other people, media, business associates and while interacting with friends and family.

Not every stock is worth to invest and to be believed to be of good or bad quality on the basis of its price movements in the market. Similarly, it is not right to conclude that all of them will be voting in favour of opposition who shares the opinion that they will win. Also not every article or opinion read on blog, newspapers or television channels are always real to believe in them, especially in context to election or politics.

The media and their experts are predicting one of the following results for the 2014 election:

  1. 1.Opposition and its alliance will make government comfortably.
  2. 2.BJP as a party to win highest numbers of seat on the party basis.
  3. 3.We might get a hang parliament and opposition will be struggling to achieve the magical number of 272 seats.
  4. 4.Congress and its alliance will not come back in power by any means.
  5. 5.There might be third front emerging and will be making a new government.

These are the five major probabilities that most of us or media and experts are talking about. You can add your opinions too and share with us what you think if they are different to them.

As per the definition of Black Swan, these events are nearly impossible to predict. So what are the other possible outcome that we are not expecting from these elections?

I can think of following two other possibilities that looks irrational today but are possible:

  1. 1.Any single party winning more than 272 seats and coming to power without any outsiders support.
  2. 2.A third front to emerge without the two biggest political parties (Congress and BJP) part of that front.

If you do have other irrational possibility other than the above and you think they should be part of it, then please share with us.

Now coming to the Black Swan moment in the stock market, then we still believe the overall market is trading in its fair value band. But almost all the investment quality grade stocks are still trading at expensive price.

We are not expecting a Black Swan scenario where market going in either directions in a range of 20% – 25% from here on. But as these are not predictable circumstances, any negative impact on the market this week might give us opportunity to grab few more of our favourite stocks in our portfolio.

With Rupee getting strong against US dollar, inflation to be expected lower and expected kick start in the economy with the new government, I personally favour  any of the Black Swan moment to take place in Indian politics and we are ready to take any opportunity thrown to us by that uncertainty. Also it will be in the interest of India to start fresh new chapter.