Will election results be a non-event for equity markets?

A day before the general election results are declared, the S&P BSE Sensex closed 140.41 points or 0.36% higher at 39,110.21 after a volatile session. While the 50-stock Nifty index gained 28.8 points or 0.25% to close at 11,737.9 on Wednesday.

While the outcome of exit polls pushed up the 30-stock S&P BSE Sensex by 1,481 points, and the 50-stock Nifty index by 438 points, on Monday.

Market veterans were expecting Tuesday to show correction over the previous day’s gains, but both the key indices were rising almost unabated in early trade on Tuesday. While the Sensex clocked a new 52-week high of 39,571.73 points, the Nifty too touched a similar high at 11,883.55.

During the day, the Sensex fell in excess of 686 points from the new high to the day’s low of 38,884.85, and finally closed the day at 38,969.8 points – a correction of 382.87 points or 0.97% from the previous day close. The Nifty too, fell over 200 points to touch the day’s low of 11,682.8 points and closed the day at 11,709.1 points – down over 119 points or 1.01% from the previous day close.

“The momentum witnessed post the outcome of exit polls has softened,” says Umesh Mehta, head of research at Mumbai-based Samco Securities. In Mehta’s view, markets seem to have factored in an NDA (National Democratic Alliance) win and on 23rd May, there seems little room for a further rally. “Today’s index behavior is just the proof needed,” he adds.

What was also interesting was the pattern of investor inflows between the last two highs on the key indices. In the 21 trading days between April 18 and May 21, when both the Sensex and Nifty moved on to hit new highs, there were 10 trading days when mutual funds were net buyers of equity to the tune of ₹8,110.7 crore and the foreign portfolio investors (FPIs) were net sellers to the tune of ₹8,882.7 crore on these days.

Further, on five instances when mutual funds were net sellers of equity worth ₹7,758 crore, FPIs were sellers on three days for equity worth ₹1,245.9 crore and buyers on four day for equity worth ₹4,766.7 crore.

Across all the 21 trading days, between April 18 and May 21, mutual funds were net buyers for equity worth ₹3,319.6 crore while FPIs were net sellers to the tune of ₹533.9 crore. Going by these numbers, it would not be wrong to presume that mutual funds were the likely exit providers to the FPIs when geopolitical as well as domestic macro-economic factors were causing too much volatility in the markets.