Election Results 2019: Why Equity Benchmarks Fell Despite A Modi Landslide

The adage ‘buy the rumour, sell the news’ might just have been in play in India’s equity market today.

Even as Prime Minister Narendra Modi’s Bharatiya Janata Party marches towards a comprehensive victory in the general election 2019, the benchmark indices swung wildly to close about 0.7 percent lower. That wasn’t the kind of reaction expected to a landslide victory for the National Democratic Alliance.

At close of trade, the NDA was leading in 342 seats, with the BJP alone likely to win 300. Something that the exit polls had predicted over the weekend. In fact, the benchmark indices surged on Monday. And market experts said that Modi’s victory was already priced in ahead of counting day.

Still, the Nifty breached 12,000 and the Sensex raced past 40,000 after the early trends showed the BJP comfortably crossing the halfway mark. In the last couple of hours of trade though, the indices fell.

At close, the Nifty had fallen 384 points from its highest level and the Sensex swung 1,312 points. The broader market gauges ended flat, and the banking index – the Nifty Bank – which had bolstered the benchmarks in early trades ended lower by 0.4 percent.

Here’s what market veterans made of today’s trade:

Valuations Don’t Justify Nifty At 12,000

Nifty at 12,000 is at the upper end of the range for rest of the year, said Sanjay Dutt, director at Quantum Securities, said. “Valuations do not justify 12,000 plus on a sustainable basis. Now the rally needs to get broader as policy action, liquidity and other issues are addressed in the economy,” he said.

Dutt advised investing in good quality second-tier stocks across sectors than betting on concentrated Nifty positions or the typical 7-10 stocks that have been taking the index higher. “Individual stocks and sector earnings will be back in focus and also emerging market flows and other global issues.”

The Big Bull

“Rome was not built in a day,” said billionaire investor Rakesh Jhunjhunwala in response to a question about what the new government would have to do to fix what may be perceived as structural issues like availability of jobs, and a liquidity crunch in the non-bank finance space.

Jhunjhunwala expects mid- and small-cap stocks, which have recently underperformed their large-cap peers, to “turn around” over the next 18 months. He anticipates that the next couple of months will lay the groundwork for the next market rally. “(I) don’t expect the stock market to rally over the next two-three months, but it may spend this time laying a strong foundation for the next bull run.”

Value At The Bottom End

Nilesh Shah, the managing director of Kotak Mahindra Asset Management, also expects a rally. An investor with higher risk appetite, he said, would be able to find value at the bottom of the the market by picking stocks where valuations haven't moved. On the other hand, if an investor sticks to the large-cap names to make fresh investments, they would either have to expand their time horizon, or reduce return expectations, Shah said.

A Voice Of Caution

Sandeep Bhatia, managing director of Macquarie Capital, sounded a note of caution. “I think we’ve all been in the markets long enough to realise that rallies around the election results are generally short-term in nature,” he said.

Bhatia pointed to structural issues that needed to be fixed to ensure the next leg of growth. Globally, the rising geopolitical tension between the U.S. and Iran is concerning from the perspective of crude prices, he said. India, being a major importer of oil, would bear the brunt of a price hike. The U.S.-China trade war could also have major repercussions, he said, adding that it had many layers.

“I wouldn’t chase the market in the current uptrend and would wait for a correction,” said Bhatia. “This isn’t the most opportune time to put in whole new positions. The market will face disappointments in the form of earnings, and therefore there will be opportunities to buy on corrections.”

Bhatia also cautioned against taking fresh positions in sectors like infrastructure, real estate and others that had direct linkages to the domestic economic cycle.

Don’t Worry About Short-term Volatility

Pointing to the fact that there is a large amount of foreign institutional money sitting on the sidelines, Nirmal Jain, chairman of the IIFL Group, said near-term volatility shouldn’t faze equity investors.

“One shouldn’t worry about the volatile markets on an intraday basis,” he said. “I think for investors, it should be a long-term buy and hold. Investors should allocate a larger part of their capital to equity and not get perturbed by short-term volatility.”

Loosening Fiscal Constraints

Rashesh Shah, chairman and chief executive officer of the Edelweiss Group, said he sees a number of challenges and issues that the new government will have to contend with. There is a sense of excitement and relief that there will be stability at the centre from a policy and reform standpoint, he said.

Shah advocates loosening of the fiscal constraints that are prescribed under the Fiscal Responsibility and Budget Management Act. “It will come at a cost, but it will spur the economy. Tax cuts and spending by the government will be very critical,” he said.