The seven-phased general elections’ schedule ended on Sunday evening, paving way for poll pundits to churn out exit poll numbers. Various exit polls have predicted the National Democratic Alliance (NDA) to win between 242 to 352 seats, with an average of 302 seats, bringing euphoria back on the bourses.

At day’s high of 39,412.56, the S&P BSE Sensex jumped over 1,481 points or 3.91% above Friday’s close of 37,930.77 points. The 50-stock Nifty index also surged over 438 points (3.84%) to 11,845.2 points compared to Friday close of 11,407.15 points. Beyond the blue chips, the S&P BSE MidCap and SmallCap indices also surged in 3.6% plus range clocking a gain of over 522 points and 438 points each by day end.

While investor behavior is in sync with the exit poll numbers, analysts are recommending some degree of sanity. “Without getting into the accuracy of exit polls, this would be the first time in last thirty years, when a majority government is likely to return with a majority in its second term as well,” writes a three-member analyst team at Mumbai-based JM Financial.

“The short-term reaction on various markets are probably easier to predict, while the impact on the real economy and hence, the medium and long-term impact on markets that much harder given the on-going domestic (rural, SME, real estate stress) and global (US-China trade war) issues,” say the JM Financial analysts led by Arshad Perwez. The trio, in the very short-term, expects a short fall in yields, currency to strengthen and equity markets to resume the rally.

“From a markets standpoint, we are entering the elections results having lightened up a little,” they add. The trio continues to like large financials, industrials and select non-financial CPSE names amongst large caps and real estate and chemicals in mid/small caps. They also continue to recommend neutral on IT though an underperformance in very near-term is likely in their view.

In a separate economy-focused report by Nomura Securities, Singapore-based Sonal Varma and Mumbai-based Aurodeep Nandi point out that if exit polls are correct and the NDA returns to power with a majority, they expect policy continuity.

“Rural reflation, infrastructure spending, streamlining of the goods and services tax, direct tax reforms and the consolidation of public sector banks are likely to be the key priorities,” Varma and Nandi write.

The economists highlight that fiscal consolidation is an objective but will be a challenge in the absence of revenue mobilisation or a growth rebound. In terms of the economic outlook, if NDA returns to power, the economists do not foresee a major reversal of the current (weak) economic conditions in the short-term, although the end of political uncertainty and policy continuity would be a medium-term positive. “The combined impact of weak global growth and tighter financial conditions due to shadow banking stress are set to moderate growth from 6.6% year on year in Q4 2018, to 6.2-6.3% in H1 2019, with risks tilted to the downside,” they said, expecting a gradual recovery towards the fourth quarter of 2019.

Interestingly, in a pre-exit poll period report by UBS Securities dated May 16, Mumbai-based analysts Gautam Chhaochharia and Dipojjal Saha, and Singapore-based strategist Rohit Arora highlighted that valuations (absolute and relative to emerging markets), investment flows (net $ 9.8 billion FII inflows in 2019, until May 16) and their investor discussions suggested that markets are factoring in a BJP-led NDA win. The trio however highlighted that India has performed largely in line with emerging markets (EMs) over the past year but outperformed by 5% post India-Pakistan issues. Earnings trajectory has lagged the EMs materially though. Broader markets and mid-caps have continued to struggle; 10 stocks drove 75% of Nifty's return since lows of 19 February. “These suggest there remains some anxiety around the election outcome as well as possibly fundamentals,” the trio noted.

According to the UBS analysts, markets might react quite differently in four albeit intuitive and non-scientific scenarios: 1) BJP single-party majority – Nifty could move up by 5-10%, crossing the upside (and recent peak) scenario of 11,800; 2) BJP-led NDA wins 250+ seats – Nifty could move up by 5% to touch its recent peak; 3) BJP-led NDA wins less than 250 seats – volatile near term and await actual government formation; and 4) non-NDA government – Nifty could potentially correct by 10-15% if we go by market reactions in 2004 and 2009 to big surprises. Given that Nifty is trading at 20 times 12 months forward PE (on UBS’ top down earnings forecast), the trio thinks the risk-reward is unfavourable, looking beyond the immediate market moves next week. “The reality check of fiscal slippage and/or a negative growth surprise, awaits markets post this binary event,” they highlight.

The fundamental worries are not going away soon, and a closer analysis of the indices strongly supports this premise. The S&P BSE Sensex clocked its 52-week high of 39,487.45 point on April 18 last month, and the current market is just 0.34% below that high mark. However, compared to the 52-week low of 39,157.22 points on October 26 last year, the index has recovered over 18.2%. Between April 18 and May 17, the Sensex closed in the red on 14 out of the 19 trading days, while the market capitalisation of the Sensex declined by ₹1,87,872 core, in absolute terms, between the two dates.

And, the S&P BSE Midcap and SmallCap indices are far from such recovery. While the Midcap index is trading 12.9% below the 52-week high of 17,017.26 points of September 3 last year, the SmallCap index is trading further lower by 17.9% compared to its 52-week high of 17,517.25 points of May 29 last year. At current index levels, both the indices have recovered over 9.5% from their 52-week lows.

Needless to say that while euphoria has took-over investor sentiments for now, until the election results are officially out on May 23, the fundamentals continue to haunt the bulls.

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