Election Results 2019: The Modi Wave Looks Strong, But Market Rally Fizzles

The Narendra Modi-led National Democratic Alliance is poised for a sweeping victory in the 2019 general election even as the final votes are yet to be tallied. And that reflects on the prevailing sentiment on Dalal Street.

Yet, the first four hours of trade in Indian equities have been frenetic and have seen as many spikes and drops as a high-octane roller coaster.

At the open, initial vote count data was already indicating that the BJP-led NDA was marching to a comfortable majority. In the key state of Uttar Pradesh, where the BJP was predicted to have trouble contending with both anti-incumbency and the challenge of the Mahagatbandhan, the NDA was already seen leading in 60 seats.

The 50-stock Nifty was, therefore, buoyant at the start and began with all its constituents in the green. Market participants were cheering initial signs that the NDA would sweep key states like Bihar, Rajasthan, Maharashtra, Madhya Pradesh and would even pose a challenge to Mamata Banerjee in West Bengal.

In the first half hour of trade, vote count data suggested that the NDA could well cross the 20-seat mark in the state out of the available 42.

Nifty At 12,000; Sensex At 40,000

At around 10:30 am, with the NDA leading in over 320 seats—and BJP in 276—the Nifty, having already blazed past its all-time high, scaled the 12,000-mark. It was matched by the 30-stock Sensex, which breached the 40,000 mark for the first time.

The broader markets, too, were surging. The Nifty Midcap index was higher by over 400 points, or 2.5 percent, while the small-cap index had gained close to 150 points or 2.3 percent.

Both the benchmark indices cooled off substantially an hour later. At 11:30 am, the Sensex was higher by 515 points at 39,630 points, while the Nifty was higher by around 160 points at 11,895 points.

At this time, the trends that had been established early in the session were solidifying. The NDA was leading in 328 seats, with the BJP ahead in 277. The Indian National Congress was leading in 64, only slightly bettering its tally in the 2014 election. The United Progressive Alliance was ahead in 106 seats.

By close to 12:00 pm, the benchmarks had given up even more ground despite the vote count showing the same trend it had at the start of the session. The Nifty and Sensex were now higher by 0.9 percent each.

Just half an hour later, the indices were trading only about 0.4 percent higher each. For the Nifty, this was a drop of over 220 points, and for the Sensex, a fall of over 780 points from the highs of the session. At this time, the NDA was leading in 335 seats and the BJP in 285. Meanwhile, the UPA’s tally had slipped below the 100 mark to 93. The Congress were leading in 53 seats.

Leading market voices at this point seemed to take an NDA victory as a given.

What Do Market Experts Think?

The Rally Will Broaden

In a chat with BloombergQuint early in the day, Nilesh Shah, managing director at Kotak Mahindra Asset Management, said the early indications were giving confidence to the market.

“Somewhere market is pricing in a stable government. It's pricing in decisive action by government, revival of earnings growth in various pockets,” he said. “There’s also an expectation that the revival of earnings growth will support the market going forward.”

So, what should an average investor read from the signs?

Shah anticipated that there will a widening of the rally that has been seen in large-cap stocks in the recent past. 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 crude 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.

‘Must Revive Animal Spirits’

“What the market is looking at is that the trends are validating the exit polls that came in,” said Ratnesh Kumar, managing director and chief executive officer of BoB Capital Markets. “There is a fair matching of the early trends with the exit polls. There would be a few ups and downs over the course of the day, but the outcome is clear.”

But after the event, Kumar believes the focus will shift back to economic and earnings fundamentals. Here, he anticipates that a slowdown will take place, unless the new government can revive the economy’s animal spirits.

Going forward, the initial focus will be the presentation of the Budget by the new government, Kumar said. “After that, the government and the central bank will have to fix the trouble brewing in the non-bank finance sector.”

He also pointed to earnings growth. “The consensus expectation is 20 percent, but half of that is coming from banking and finance. The delivery of that projection will be crucial to watch for.”