Cheering the possibility of the NDA returning to power for a second term, the stock markets logged some of the highest gains on Monday, while also continuing the momentum, opening at record highs on Tuesday.
On Tuesday, S&P BSE Sensex touched the 39,500 level for the first time, while the NSE Nifty 50 rose by around 0.42% to 11,877.90. The markets cooled off by noon with the Sensex trading at 39,447.74 level and Nifty trading at 11,844.05 as of 12:12 pm.
On Monday, the equity indices witnessed their biggest intra-day gain since September 10, 2013.
TNM spoke to a few analysts to understand why the markets are so upbeat about the possibility of Narendra Modi-led NDA government coming back to power and what this means for investors.
Markets like stability
“Any investor likes continuity of policies and wants a stable government,” says market expert Ambareesh Baliga.
According to Alok Churiwala, MD of Churiwala securities, the general elections is always a big event for capital markets because it defines the next five years and what kind of economic policies there will be. This has a direct impact on the stock market.
The main reason for the rally, according to experts, is of course the result of the exit polls. And why the markets are cheering the return of BJP at the Centre is because there were doubts if the current government would get a majority, which led to investors being cautious. Return of the NDA for the market will mean a stable government and stable policies.
“In anticipation of results, since signals were very confusing and one couldn’t figure which way the country will vote, the market was extremely cautious. Moreover, international cues such as the US-China trade tensions played a major role in the market being depressed. But now all exit polls are trending in a singular direction and the market has cheered that with a 3% rise in the Sensex and Nifty,” Alok says.
Ambareesh adds that markets like a stable government at the Centre with a strong leader. “That’s what Foreign Institutional Investors (FII) also like. Post the Balakot strike, FIIs were pumping in money since there was some cue that possibly nationalism will come back to the fore and help BJP return to power,” he adds.
Market expert Ajay Bagga also echoes the same sentiment. “The fear of uncertainty has now gone out and there is assurance of political and policy stability. And now that the fear is gone, there is also new money coming in from foreign investors. FIIs had pulled out nearly Rs 10,000 crore in May and all of a sudden, they have now put in Rs 1,700 crore on the exit poll forecast.”
However, despite the euphoria on Monday, the markets have begun to cool down after opening on a high on Tuesday. Experts believe that some investors will now take advantage of the markets going up and begin selling their stocks to make profits. This will result in the markets cooling off. The focus will now shift back to the earnings season and the economy. On May 23, once the results start coming in, early trends can also cause the markets to rally again.
What if, the exit polls go wrong?
In the event that the exit polls get the final outcome wrong and either the UPA or a Third Front comes to power, experts say that the markets will see a bloodbath.
Back in 2004, when exit polls predicted that the Atal Bihari Vajpayee government will come back to power and it didn’t, the market fell so sharply that it had to be shut down.
Experts say that the same will happen this time around as well, if the results end up being the opposite of exit polls’ prediction.
“If exit polls are wrong, there would be disaster as far as markets are concerned. Markets can fall 5-10% causing them to shut down and go to a lower circuit,” Alok says.
A lower circuit is the minimum price to which a stock can be allowed to fall. Stock exchanges usually determine circuit levels to protect investors from unexpected or volatile movement.
What you can do as an investor
If you are not a very savvy investor, Alok suggests that you wait and watch from the sidelines and do something only when clarity emerges. Do not try and hedge your positions at the last minute.
“Hedging is sophisticated and not every investor is capable of doing so on their own. If they have access to good professional advice, then lay investors can hedge by going the opposite direction on Nifty – which way they expect the market to go,” he says, adding that this is an event that may or may not happen and in that case, the insurance of the hedge may prove slightly expensive when the markets move against your hedged position.
Hedging here means that you are protecting yourself from a negative event and reducing the impact of a risk you are exposed to. In this case, it would mean that you make another investment that could give you some gains and offset the possibility of drastic losses on an existing investment.
What markets expect from the new government
If the NDA government comes back to power as predicted by exit polls, experts say that its first focus should be on kickstarting the economy, which has seen considerable slowdown. Infrastructure development will have to gather more pace and consumption needs to be pulled up.
The markets will be looking at what the growth strategies of the government will be and how it also tackles major issues such as unemployment and the agrarian crisis. The full budget, which will be announced in July, will also play an important role.
“The government needs to reignite the consumer spend. I don’t know if they will manage that in the budget, but the new Finance Minister will have to do the balancing act and do something to kickstart the consumer demand,” Ambareesh says.
Ajay says that while the government did a good job in controlling inflation, the focus needs to be on growth, which he believes can be done through tax cuts, cutting GST on some industries such as automobile.
“Cutting interest rates is another easy lever, which will be watched in the next RBI policy meet in June. But the fastest way to spur growth will be to cut taxes and give some investment allowance to businesses, give more benefits for starting new businesses and put more money into people’s pockets immediately. That could come from personal tax cuts and some amount of dole-outs to the poorest sections by increasing subsidies.”
According to Alok, the new cabinet’s statement of intent will determine which way the market will go. “How the new government will tackle drought and the agrarian crisis will be telling. Also, whether the new government will focus on setting the economy right and what kind of programmes and policies will be announced to boost investor sentiment, remains to be seen.”