Sensex in a churn as poll result speculation takes centre stage

The Indian stock markets have been volatile for some time now and there seems to be multiple reasons for investors to fret.

One of the most obvious reasons could be the prospect of a hung Parliament, with various reports pointing to the possibility of Narendra Modi not returning with a clear majority. Should investors be spooked about an unstable government or a non-BJP government taking the reins at the Centre? Some reports have suggested a third front government while some others have even hinted at a Congress-led coalition at the helm.

Apart from worries over which government will take charge at the Centre, the markets have also been worried with global concerns such as the trade war between the two largest economies – the US and China.

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Investor worries are reflected in the performance of the Nifty. According to an analysis by Kotak Mutual Fund, the Nifty’s one-month return was 1.1%, against a 9.4% annual return and 14.4%  compound annual growth rate (CAGR). Midcaps and small caps have corrected sharply in the past 12 months at – 13.4% and 22.9% respectively. And brokerage Anand Rathi has said that the Nifty gained 2.7% YTD (year to date) while the Sensex has gained 2.9%. But compared to global indices such as Dow Jones, S&P 500 and FTSE, the gains YTD are much lower. Also, equity inflows by FIIs have been significantly lower in April compared to March 2019. Some analysts have discounted the theory that a non-BJP government at the Centre will roil markets. In fact, Ravi Muthukrishnan, Pradeep Kumar Kesavan, and Anushka Chhajed of brokerage Elara Securities have said that election years have generally been positive for the markets based on their analysis of past three general elections. Two of them saw the UPA come to power while in 2014, the present NDA government assumed charge.

What the analysis reveal

Their analysis also revealed that:

(a) in all the three previous elections, the post-election market returns are higher than pre-election period. The CYTD (calendar year to date) Nifty return is ~8%, providing ample scope for post election rally

(b) at a sector level, the pre-election performances is a mixed bag but the post election rallies have been broad based with positive returns for almost all sectors with the exception of energy (2014) and telecom (2009)

(c) in line with past trends, the pre-election spike in market volatility is playing out and the volatility is likely to cool-off post elections.

But a poll conducted by a business news channel last week considered three likely scenarios and the likely impact of each on the Nifty:

1) BJP gets two-thirds majority: Best case scenario for the Nifty, which would then remain in the 11700-12300 range

2) Congress lead UPA government: The Nifty falls to between 10500-11800

3) Third Front government: Worst case scenario with Nifty below 10,000

Meanwhile, analysts at ICICI Securities have pointed out that the current volatility in Indian equity markets is in line with global peers. They have said that across the global markets, the equity indices have fallen since the disruptions in US-China trade talks have started. “We believe the current fall in Nifty should not be linked with any probable domestic election outcome. If the global jitters get stabilised the markets should come back to normalcy. The global equity performance has deteriorated with an average fall of 5% since the start of May. In addition the volatility has increased across the equity indices. This shows the global linkage to current Nifty decline.”

The other view

So both Elara and ICICI Securities are not putting the onus of the current market volatility on the outcome of the Lok Sabha polls.

The ICICI analysts have also pointed out that most of the EM (emerging market) currencies have witnessed depreciation against US$ following the slump in Chinese Yuan, which has seen the highest depreciation amongst all EM currencies. They further said that FII (Foreign Institutional Investor) outflows were seen across the emerging markets hence if the global sentiment recovered, “we would see FII inflows to resume again. As the currency depreciation and recent FII outflows are common to all the emerging markets, we should not link recent Nifty fall with domestic elections.”

Meanwhile the Elara analysts have explained what needs to be done by whichever government finally comes to power to improve the economy and hence the markets: BJP (leader of NDA coalition) and the Congress (leader of UPA coalition) have promised to stick to fiscal discipline in their respective election manifestoes but have also espoused a mix of populist and development oriented measures, that are likely to stretch the fiscal situation and could boost the economy through public spending.

“However, to counter the sluggish private investments, sticking to fiscal discipline and avoiding crowding out of financial markets, would be key to increase in private investment activity, in our view,” they added.

It is obvious then that whichever government comes to power, sticking to fiscal prudence and ensuring growth will keep markets in robust health.

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