At the end of the political game, rationality wins in markets

Nearly two hours after the markets opened, the benchmark S&P BSE Sensex hit an all-time high of 40,124.96 on Thursday, the vote counting day of general election 2019; the National Stock Exchange's Nifty 50 breached the psychological mark of 12,000, to hit its all-time high of 12,041.15.

But, like the euphoria on Monday, a day after poll pundits doled out exit poll predictions, today again the boom did not last too long. Both indices turned red in the last hour of trading. At the close of trading hours, the Sensex ended lower by 299 points, or 0.76%, at 38,811.39. The gap between the day’s (and, all-time) high of the Sensex, 40,124.96 points, and that of the day’s low of 38,651.61 points was 1,472.35 points or 3.67%. The Nifty, too, closed lower by 80.85 points, or 0.69%, at 11,657.05 points. It swung 426.65 points, or 3.54%—between the day’s (as well as all-time) high of 12,041.15 and low of 11,614.5 points.

Analysts were quite vocal about challenges for the incumbent government. Mumbai-based Amnish Aggarwal, head of research at broking firm Prabhudas Liladher, asserts that election results are positive for the market, as it gives a stable government for the next five years. “However post initial euphoria, the focus would shift to hardcore economic decisions and the manner in which slowdown and economy are handled in Modi 2.0,” says Aggarwal, who is positive on the long term for the markets, with a Nifty target (in a bullish scenario) of 13,000. “For which growth rates need to catch up," he adds.

On the other end, Rusmik Oza, head of fundamental research at Kotak Securities, sees limited upside for the Nifty in the near future. Oza says part of the passive money that has come by way of exchange-traded funds (ETFs) in the past three months could move out if the Nifty goes above 12,000. He sees more value and upside in the mid- and-small-cap space hereon. “With the National Democratic Alliance (NDA) coming back to power we can expect local investors to take comfort in the mid- and-small-cap space with a longer two-three year horizon, and inflows could resume in them,” says Oza.

However on the D-day, investors seem to have had a lesser interest towards mid-cap and small-cap stocks. The S&P BSE MidCap and SmallCap, at their day’s high, swung 327.52 and 241.34 points each over their previous close. Before closing the day lower by 21.46 and 16.33 points, respectively, the MidCap and SmallCap saw respective gaps of 348.98 and 257.67 points between their day’s high and low values.

Back to the benchmark indices, a team of two equity strategists and two economists at Morgan Stanley India reiterated in a reaction note that they see the Sensex at 45,000 in June 2020 in a bull-case scenario. On the expected policy framework front, the Morgan Stanley team, led by Ridham Desai, pointed out that in continuity in administration, equity markets can predict policy. “India's policy certainty index relative to the world which was threatening to roll-over could now make fresh peaks,” they said in the note. On the markets front, they believe that the focus will now shift to the growth cycle, on which they are constructive. They expect the Reserve Bank of India (RBI) to be more accommodative and the economy to come out of its soft patch of the past few months. “Earnings could be heading into a new cycle and domestic flows should return with strength,” they said in the note while forecasting an upside of 15% on the Sensex, to touch 45,000 by June 2020. Similarly, they see the Nifty around 13,500 by the same time. The risks factors for equity markets, according to the Morgan Stanley team, are most global, like crude oil prices, actions from the US Federal Reserve and the (on-going) trade tensions. “But our call assumes resolution to the ongoing strain in the financial sector via liquidity infusion and continuing fiscal discipline,” they note.

In a separate reaction, Mumbai-based Umesh Mehta, head of research at Samco Securities, opines that ‘The Law of Alternatives’ is something to remember if you are a player on Dalal Street. “As contrary to the general consensus that history will repeat itself, in the stock market nothing goes as planned,” says Mehta. He reiterates that majority market pundits had predicted that since the BJP gained higher majority compared to 2014 elections, markets will scale new highs even in the short term. “But the exact opposite happened,” says Mehta. “Just like 345+ seats for the NDA is a surprise, markets have also surprised everyone by falling,” Mehta adds.

One can barely argue with Mehta as he opines that politics is largely an emotional side of humans, but the markets behave rationally. And therefore, majority are shocked to see the market falling after clear trends of an election outcome. According to Mehta, internals of the market were far weaker this time because open interest had increased by only 5% after the exit polls, but there was a massive increase in open interest after the 2014 exit polls. “This clearly showed that sentimentally Mr. Market was supporting bulls but hard money was not flowing in,” he adds.

Prabhat Awasthi, Nomura’s country head for India, points at a bigger question for the longer term: Whether NDA 2.0 would be materially different from NDA 1.0?

“The upside scenario for the economy and the market is that as the benefits of some of the structural reforms such as the goods and services tax (GST), Bankruptcy Bill, etc., start flowing in, the government moves and focusses on the next round of policy reforms” says Awasthi.

In a separate economy-focussed report by Nomura Securities, Singapore-based Sonal Varma and Mumbai-based Aurodeep Nandi opine that, unlike the BJP’s first term, where prudence came at the cost of growth, the policy priority in the second term will be reigniting growth with prudence as a secondary priority.

“We do not foresee a major reversal of the current (weak) economic conditions in the short term, although policy continuity and the end of political uncertainty would be a positive."

The duo is of the view that if the current pace of reforms sustain, then India’s potential growth over the next five years should rise to nearly 7.5% from around 7% currently. “However, if the new government manages to leverage its political capital to invigorate private investment, then we believe potential growth could rise to around 8%,” they write.

It would not be unfair to say that the election euphoria lasted for the first 105 minutes, after which rationality in the equity market ensured that the election results gradually started turning into a non-event.