Market bets big on Modi, as it sees little hope elsewhere, reveals FC survey of brokers
Elections are a big event for the nation. They are also a big event for the stock market. When the UPA emerged victorious in the 2009 general election without the support of the leftists, the stock market rallied to hit the upper circuit twice during the course of a single day’s trading, forcing the market to halt trading that day. Still five years earlier, in 2004, the market plunged to hit the bottom circuit when the NDA unexpectedly lost the election.
2009 saw a dream run on the Street. The BSE Sensex surged almost 80 per cent during the year on hopes of the US economy reviving, riding the trillion-dollar bailout. The election results added to the euphoria. It was then expected that India would soon be out of the woods and embark on a high growth path.
Still five years on, that dream remains just that. An illusion.
UPA II severely eroded the economic fundamentals of the nation triggered by unheard of corruption and policy paralysis. GDP growth sank below the five per cent level from the high-octane 9 per cent growth; rising current account deficit (CAD) haunted investors like never before.
The government took extreme steps to narrow the trade gap and arrest the rupee’s steep fall after it plunged to new depth last year. Curbs were placed on gold import by raising the import duty to as much as 10 per cent. Inflation too offered no respite, leaving no room to the Reserve Bank of India (RBI) to cut interest rates significantly. The capital-intensive sectors collapsed. Adding to those woes, the government failed to muster support to clear major legislations in Parliament.
How will the Street fare this year?
Weeks before the elections commence from April 7, Dalal Street seems to be riding the so-called ‘hope rally’, with market players expecting a decisive verdict favouring Narendra Modi to form the next government. Opinion polls are betting on the NDA reaching close to the majority mark, triggering the current euphoria.
The market hopes that Modi, with his business-friendly image in Gujarat, will usher in the feel-good factor necessary for reviving the economic momentum, if given a hand in managing the national government.
The market is also betting on Modi initiating major long-pending reforms following years of policy paralysis under the UPA regime.
Stocks are already in the uncharted territory with both BSE Sensex and NSE Nifty trading at all-time highs. Only time will tell, whether this is the start of a new bull run, or the market is headed for a crash should a fractured verdict or a “Third Front” government stare the nation in the face.
To gauge the mood of the market ahead of the elections, Financial Chronicle sought out 10 stock broking firms to participate in a survey. Geojit BNP Paribas, Angel Broking, Kotak Securities, ICICI Securities, HDFC Securities, SMC Investments, Motilal Oswal Financial Services and Emkay Financial Services participated. Anand Rathi and IIFL refrained from sharing their views. Most brokerages surveyed believed the polls would throw up a decisive verdict favouring a BJP-led NDA government.
Dhananjay Sinha, head of institutional research at Emkay Global, said: “Based on the recent media surveys, it appears that there is a high chance of BJP forming the next government. However, it is going to be a coalition. The BJP is seen working hard to go beyond the Hindi heartland and also tying up with regional parties.”
Sinha is not alone.
Angel Broking’s CMD Dinesh Thakkar echoed: “Markets are hoping for a strong show by the BJP-led government in the general elections owing to their pro-development and reform agenda. In case that happens over the coming six months, then I believe that the market momentum would strengthen benefiting stocks in cyclical sectors.”
DK Aggarwal, CMD of SMC Investments and Advisors, added: “We expect the mandate to be decisive this time around, which would help in better policy execution and also help restore confidence among various stakeholders to help the economy come back on the growth path.”
On the downside, others are haunted by the prospect of the BJP not making the grade.
If the Third Front is able to cobble up a majority after the elections, the market may crash. “If we see a fractured mandate or a Third Front becoming strong, we are going to see a huge crash in the markets,” warned Sanil Kumar, head of sales at Geojit BNP Paribas Financial Services.
Others like Deepak Jasani, head of retail research at HDFC Securities, sees post-results realignment of political forces. “UPA or NDA may find it difficult to cobble up majority on their own in the first shot. Hence, post-results realignment is likely,” he said.
According to him, a Delhi-type experiment is possible where the Third Front would come to power with external support from the UPA or NDA. “Going by the strength of the current bull run, the market expects the NDA to form a government at the centre with a comfortable majority,” Jasani said.
Pankaj Pandey, head of research at ICICI Securities, however, felt there were slim chances of a Third Front government coming to power in Delhi after the April-May elections. “Indian politics in the past 15 years has revolved around alliances with regional parties. Nonetheless, we believe even though regional parties would continue to play a major role in Indian politics, the emergence of the Third Front may be a small possibility,” he said.
The current rally, which took the Sensex past 22,000 on Monday, showed that there is a revival in investor sentiment. “We believe the recent revival in investor confidence is fuelled by expectations of a strong government with growth-oriented reformist agenda,” Pandey said.
Analysts expected the current exuberance to last till the results are announced on May 16. “In December 2013, we had said the election-related exuberance may spike up Sensex to 22,000 level. That has been achieved. There is a possibility of the index rising even higher near the results date. However, the market can be very volatile, as the current move is largely based on hopes and will not be backed by any fundamental factors,” said Sinha of Emkay Global.
Historically, election results have had minimum impact on the state of the economy, as economic reforms are a long-term process to be implemented at the ground level. “Therefore, the market reaction to the election would be a short-term phenomenon,” Pandey said.
The market would not fall drastically, if there were a correction ahead of the election results. After hitting 22,000, Sensex closed at 21,809.80 on Friday.
“The market may not fall in a big way whatever be the outcome of the elections, if it falls or corrects sufficiently ahead of the results,” said Jasani of HDFC Securities. He said any new government would have to show thrust on reforms in the initial days. However, the conviction or the strength of the thrust may differ.
Going by opinion polls and surveys so far, the market seeks a higher probability of a decisive mandate this summer. “In case of a strong positive mandate in the elections, we expect the positive momentum in the equity market to continue. This will be supported by global cues as well as improving domestic fundamentals. Attributing a 16 times multiple to our Sensex EPS, we arrive at a target of 24,600 for the Sensex by end-December 2014,” said Thakkar.
The market will certainly view a decisive mandate positively.
“If a single party comes to power after the elections, we may see the Sensex moving towards 26,000 and, possibly 29,000, by the end of the year,” reckoned Geojit’s Sanil Kumar.
Likewise, Aggarwal of SMC Investments believes that if the election outcome reflects the market’s mood, then Sensex would be closer to 24,000 post elections and possibly in the 26,000-27,000 range by December.
Dipen Shah, head of private clients group of Kotak Securities, said the recent rise in stock prices was due to the optimism of a favourable outcome of the election process and the establishment of a stable and pro-reforms government.
We asked the brokerages to list the five biggest priorities for the next government.
Aggarwal said the government must improve governance; remove corruption; set double-digit growth target for the economy with clarity on how to achieve it; hugely emphasise on physical and social infrastructure development; and above all strengthen economic parameters with regard to fiscal deficit, trade and foreign exchange reserves.
Jasani of HDFC Securities suggested a similar goal: governance, employment generation, police and judicial reforms, supply side reforms and greater accountability.
The market expects a lot of action from a potential Modi-led government. “However, I think the market may be expecting a little too much. BJP policies are unlikely to be the same as they were during 1999-2004, as they lost the election in 2004 after following their growth strategies. Reversing or even rationalising the UPA government’s policies will require significant political strength and there can be serious social implications that can make BJP unpopular. This is something they might not be able to afford from a political standpoint,” Sinha of Emkay Global said.
The new government should focus on issues of structural reforms, particularly in the mining and power sectors, expedite clearances to projects stuck at various stages of implementation, revive business confidence, boost production in the manufacturing sector and bring in transparent and clean governance, said Angel’s Thakkar.
Kotak Securities’ Dipen Shah said the next government should focus on resolving the issues in the infrastructure sector. Removing administrative and operational hurdles will go a long way in boosting investment. Resolving supply-side constraints in primary articles, including food grains, will help further ease inflationary pressures.
According to Ambit Capital, seven out of the past eight general elections were followed by strongly positive stock market returns (with the Sensex posting an return of 27 per cent per annum in the two-year period following the elections).
“Over the past three decades, India has seen three waves in its politics, its economy and its stock market. Each wave has begun with a political reset wherein a new party or coalition has come to power with a fresh economic ideology, which, in turn, has helped lift the economy and the stock market,” Ambit Capital explained in a note.
There is a strong case for investing in India’s “fourth wave’, the brokerage said.
Rakesh Tarway, vice-president and head of equity strategies and equity & derivatives product at Motilal Oswal Securities, said the current valuations are factoring in a fair bit as the market has rallied almost 10 per cent in the past two months.
Given our demographics, the market is also positive that the new government, which comes to power after the general election, is likely to focus on boosting infrastructure investment and creating new employment opportunities in the economy to improve the growth trajectory.
Sinha of Emkay said he was not sure if NDA could change the food security and land acquisition laws. “How will the BJP control inflation when it has backed higher support prices for paddy in the recent state elections,” he asked.
Brokerages expect the new government to undertake the stalled reforms. “We believe that it will be imperative for the new government to take quick steps on fiscal reforms. Without that, it will be difficult for the Indian economy to sustain current growth rates,” said Shah of Kotak Securities.
“What’s BJP’s approach towards improving labour productivity and generating employment. One will need to see how BJP progresses,” said Sinha of Emkay Global. “In my view, the market may be pricing in significant growth rebound in the next 6-12 months, say IIP growth of over 10 per cent and GDP growth of 7-8 per cent. Meeting these expectations will be a challenge for the next government and will determine the sustenance of FII flows,” he said.
Foreign inflows, which are crucial for the Indian market, may come in if there is a decisive verdict. “If the new government is able to implement reforms effectively, foreign investors may increase participation in Indian equities,” said Pandey of ICICI Securities.
FII and FDI inflows would also come after the elections. “The stability of the government and its reforms credentials will be speculated upon by the foreigners, and this will impact flows from them,” HDFC Securities’ Jasani said.
Sanil Kumar of Geojit BNP Paribas pointed out that despite the taper by the US Federal Reserve, India has been receiving foreign flows, which helped the market gain considerably and even move to uncharted territory last week. “FIIs will continue to flock to India as it has given good returns in the past. India is one of the best investment havens for them,” Kumar said.
In the run-up to the last elections, the market was trading at multi-year lows. In the run-up to the elections this year, stocks are trading at all-time highs. With the election results expected on May 16, the market seems to have already placed its bets. Whether the market will reward them or not we’ll know only after the outcome is known.
Elections are a big event for the nation. They are also a big event for the stock market. When the UPA emerged victorious in the 2009 general election without the support of the leftists, the stock market rallied to hit the upper circuit twice during the course of a single day’s trading, forcing the market to halt trading that day. Still five years earlier, in 2004, the market plunged to hit the bottom circuit when the NDA unexpectedly lost the election.
2009 saw a dream run on the Street. The BSE Sensex surged almost 80 per cent during the year on hopes of the US economy reviving, riding the trillion-dollar bailout. The election results added to the euphoria. It was then expected that India would soon be out of the woods and embark on a high growth path.
Still five years on, that dream remains just that. An illusion.
UPA II severely eroded the economic fundamentals of the nation triggered by unheard of corruption and policy paralysis. GDP growth sank below the five per cent level from the high-octane 9 per cent growth; rising current account deficit (CAD) haunted investors like never before.
The government took extreme steps to narrow the trade gap and arrest the rupee’s steep fall after it plunged to new depth last year. Curbs were placed on gold import by raising the import duty to as much as 10 per cent. Inflation too offered no respite, leaving no room to the Reserve Bank of India (RBI) to cut interest rates significantly. The capital-intensive sectors collapsed. Adding to those woes, the government failed to muster support to clear major legislations in Parliament.
How will the Street fare this year?
Weeks before the elections commence from April 7, Dalal Street seems to be riding the so-called ‘hope rally’, with market players expecting a decisive verdict favouring Narendra Modi to form the next government. Opinion polls are betting on the NDA reaching close to the majority mark, triggering the current euphoria.
The market hopes that Modi, with his business-friendly image in Gujarat, will usher in the feel-good factor necessary for reviving the economic momentum, if given a hand in managing the national government.
The market is also betting on Modi initiating major long-pending reforms following years of policy paralysis under the UPA regime.
Stocks are already in the uncharted territory with both BSE Sensex and NSE Nifty trading at all-time highs. Only time will tell, whether this is the start of a new bull run, or the market is headed for a crash should a fractured verdict or a “Third Front” government stare the nation in the face.
To gauge the mood of the market ahead of the elections, Financial Chronicle sought out 10 stock broking firms to participate in a survey. Geojit BNP Paribas, Angel Broking, Kotak Securities, ICICI Securities, HDFC Securities, SMC Investments, Motilal Oswal Financial Services and Emkay Financial Services participated. Anand Rathi and IIFL refrained from sharing their views. Most brokerages surveyed believed the polls would throw up a decisive verdict favouring a BJP-led NDA government.
Dhananjay Sinha, head of institutional research at Emkay Global, said: “Based on the recent media surveys, it appears that there is a high chance of BJP forming the next government. However, it is going to be a coalition. The BJP is seen working hard to go beyond the Hindi heartland and also tying up with regional parties.”
Sinha is not alone.
Angel Broking’s CMD Dinesh Thakkar echoed: “Markets are hoping for a strong show by the BJP-led government in the general elections owing to their pro-development and reform agenda. In case that happens over the coming six months, then I believe that the market momentum would strengthen benefiting stocks in cyclical sectors.”
DK Aggarwal, CMD of SMC Investments and Advisors, added: “We expect the mandate to be decisive this time around, which would help in better policy execution and also help restore confidence among various stakeholders to help the economy come back on the growth path.”
On the downside, others are haunted by the prospect of the BJP not making the grade.
If the Third Front is able to cobble up a majority after the elections, the market may crash. “If we see a fractured mandate or a Third Front becoming strong, we are going to see a huge crash in the markets,” warned Sanil Kumar, head of sales at Geojit BNP Paribas Financial Services.
Others like Deepak Jasani, head of retail research at HDFC Securities, sees post-results realignment of political forces. “UPA or NDA may find it difficult to cobble up majority on their own in the first shot. Hence, post-results realignment is likely,” he said.
According to him, a Delhi-type experiment is possible where the Third Front would come to power with external support from the UPA or NDA. “Going by the strength of the current bull run, the market expects the NDA to form a government at the centre with a comfortable majority,” Jasani said.
Pankaj Pandey, head of research at ICICI Securities, however, felt there were slim chances of a Third Front government coming to power in Delhi after the April-May elections. “Indian politics in the past 15 years has revolved around alliances with regional parties. Nonetheless, we believe even though regional parties would continue to play a major role in Indian politics, the emergence of the Third Front may be a small possibility,” he said.
The current rally, which took the Sensex past 22,000 on Monday, showed that there is a revival in investor sentiment. “We believe the recent revival in investor confidence is fuelled by expectations of a strong government with growth-oriented reformist agenda,” Pandey said.
Analysts expected the current exuberance to last till the results are announced on May 16. “In December 2013, we had said the election-related exuberance may spike up Sensex to 22,000 level. That has been achieved. There is a possibility of the index rising even higher near the results date. However, the market can be very volatile, as the current move is largely based on hopes and will not be backed by any fundamental factors,” said Sinha of Emkay Global.
Historically, election results have had minimum impact on the state of the economy, as economic reforms are a long-term process to be implemented at the ground level. “Therefore, the market reaction to the election would be a short-term phenomenon,” Pandey said.
The market would not fall drastically, if there were a correction ahead of the election results. After hitting 22,000, Sensex closed at 21,809.80 on Friday.
“The market may not fall in a big way whatever be the outcome of the elections, if it falls or corrects sufficiently ahead of the results,” said Jasani of HDFC Securities. He said any new government would have to show thrust on reforms in the initial days. However, the conviction or the strength of the thrust may differ.
Going by opinion polls and surveys so far, the market seeks a higher probability of a decisive mandate this summer. “In case of a strong positive mandate in the elections, we expect the positive momentum in the equity market to continue. This will be supported by global cues as well as improving domestic fundamentals. Attributing a 16 times multiple to our Sensex EPS, we arrive at a target of 24,600 for the Sensex by end-December 2014,” said Thakkar.
The market will certainly view a decisive mandate positively.
“If a single party comes to power after the elections, we may see the Sensex moving towards 26,000 and, possibly 29,000, by the end of the year,” reckoned Geojit’s Sanil Kumar.
Likewise, Aggarwal of SMC Investments believes that if the election outcome reflects the market’s mood, then Sensex would be closer to 24,000 post elections and possibly in the 26,000-27,000 range by December.
Dipen Shah, head of private clients group of Kotak Securities, said the recent rise in stock prices was due to the optimism of a favourable outcome of the election process and the establishment of a stable and pro-reforms government.
We asked the brokerages to list the five biggest priorities for the next government.
Aggarwal said the government must improve governance; remove corruption; set double-digit growth target for the economy with clarity on how to achieve it; hugely emphasise on physical and social infrastructure development; and above all strengthen economic parameters with regard to fiscal deficit, trade and foreign exchange reserves.
Jasani of HDFC Securities suggested a similar goal: governance, employment generation, police and judicial reforms, supply side reforms and greater accountability.
The market expects a lot of action from a potential Modi-led government. “However, I think the market may be expecting a little too much. BJP policies are unlikely to be the same as they were during 1999-2004, as they lost the election in 2004 after following their growth strategies. Reversing or even rationalising the UPA government’s policies will require significant political strength and there can be serious social implications that can make BJP unpopular. This is something they might not be able to afford from a political standpoint,” Sinha of Emkay Global said.
The new government should focus on issues of structural reforms, particularly in the mining and power sectors, expedite clearances to projects stuck at various stages of implementation, revive business confidence, boost production in the manufacturing sector and bring in transparent and clean governance, said Angel’s Thakkar.
Kotak Securities’ Dipen Shah said the next government should focus on resolving the issues in the infrastructure sector. Removing administrative and operational hurdles will go a long way in boosting investment. Resolving supply-side constraints in primary articles, including food grains, will help further ease inflationary pressures.
According to Ambit Capital, seven out of the past eight general elections were followed by strongly positive stock market returns (with the Sensex posting an return of 27 per cent per annum in the two-year period following the elections).
“Over the past three decades, India has seen three waves in its politics, its economy and its stock market. Each wave has begun with a political reset wherein a new party or coalition has come to power with a fresh economic ideology, which, in turn, has helped lift the economy and the stock market,” Ambit Capital explained in a note.
There is a strong case for investing in India’s “fourth wave’, the brokerage said.
Rakesh Tarway, vice-president and head of equity strategies and equity & derivatives product at Motilal Oswal Securities, said the current valuations are factoring in a fair bit as the market has rallied almost 10 per cent in the past two months.
Given our demographics, the market is also positive that the new government, which comes to power after the general election, is likely to focus on boosting infrastructure investment and creating new employment opportunities in the economy to improve the growth trajectory.
Sinha of Emkay said he was not sure if NDA could change the food security and land acquisition laws. “How will the BJP control inflation when it has backed higher support prices for paddy in the recent state elections,” he asked.
Brokerages expect the new government to undertake the stalled reforms. “We believe that it will be imperative for the new government to take quick steps on fiscal reforms. Without that, it will be difficult for the Indian economy to sustain current growth rates,” said Shah of Kotak Securities.
“What’s BJP’s approach towards improving labour productivity and generating employment. One will need to see how BJP progresses,” said Sinha of Emkay Global. “In my view, the market may be pricing in significant growth rebound in the next 6-12 months, say IIP growth of over 10 per cent and GDP growth of 7-8 per cent. Meeting these expectations will be a challenge for the next government and will determine the sustenance of FII flows,” he said.
Foreign inflows, which are crucial for the Indian market, may come in if there is a decisive verdict. “If the new government is able to implement reforms effectively, foreign investors may increase participation in Indian equities,” said Pandey of ICICI Securities.
FII and FDI inflows would also come after the elections. “The stability of the government and its reforms credentials will be speculated upon by the foreigners, and this will impact flows from them,” HDFC Securities’ Jasani said.
Sanil Kumar of Geojit BNP Paribas pointed out that despite the taper by the US Federal Reserve, India has been receiving foreign flows, which helped the market gain considerably and even move to uncharted territory last week. “FIIs will continue to flock to India as it has given good returns in the past. India is one of the best investment havens for them,” Kumar said.
In the run-up to the last elections, the market was trading at multi-year lows. In the run-up to the elections this year, stocks are trading at all-time highs. With the election results expected on May 16, the market seems to have already placed its bets. Whether the market will reward them or not we’ll know only after the outcome is known.
