Markets look for continuity in reforms post-polls

In 2004, stock markets hit a bottom when NDA was voted out of power and a new government led by UPA came at the Centre. It lost 15% in just two trading sessions. The results were not according to the market sentiment. There was a fear that continuity in policies may be broken. But after the initial disappointment, there was a non-stop bull rally, which came to an end only when the global financial crisis hit in 2008.

But in 2009, when UPA retained power, the market was a net gainer. Close to 17% on the result day. It went into a tailspin only after scams hit the government. After 2014 general elections, the BJP came with full majority and market was euphoric. Though there was a change of government at the Centre, the numbers gave a sense that it would be stable government. A sturdy dispensation, reforms and policy continuity is all that stock, bond and money markets look for and election volatility is short-lived.

By that standard, if UPA or NDA comes back to power with a majority, the market sentiment will, of course, be high. But an unstable coalition government could hit valuations and impact sentiments.

Various combinations on which the market participants are working at the moment are -- A Modi-led NDA government, NDA without Modi, BJP forming the government with the help of non-NDA regional parties and UPA on its own or with the help of other regional parties.

“If the existing party comes with a big margin, obviously markets will cheer. The big difference would be in the Midcaps which have been under-performing since last one year. Nifty can zoom 5% to 6% and midcaps may be more and we can see the out performance of midcaps.

“Even in case of the NDA with a slender margin, markets will do well. NDA without Modi, there will be no impact as markets want a stable government. In case of UPA or third front, the markets will correct 9% to 10% and midcaps will lose pace,” according to Rahul Shah, Vice President, Equity, Motilal Oswal.

Markets rebound

This time around, the markets have rebounded after hitting the year’s low on February 19. They do not appear nervous and have shrugged off global slowdown fears. The volatility index has come down sharply. Foreign fund flows are high and underlying growth momentum has prompted global investment banker Goldman Sachs to upgrade its outlook on India to “overweight”. Some say they have factored in re-election of the Modi-led NDA government, others believe the on-going reforms, bank clean up and RBI dollar-rupee swap have helped companies and brought stability in foreign exchange regime, a net positive for markets.

In that case, what will happen if NDA does not return to power? Analysts say it could be similar to 2004. Markets fell after a change of government at a time when markets had factored-in NDA’s win. But it was short-lived.

“The ongoing reforms will not be paused even if UPA comes to power. India has travelled a considerable distance in the past five years but reforms in infrastructure sector, banking and insurance, real estate are still halfway through. No government would like to halt that,” according to a brokerage firm, which said it would really make no difference if UPA wrests power but there should not be a coalition of many parties.

Markets and global funds are bullish on India even though opinion polls have said Modi will win with a reduced majority. Sensex and Nifty kept hitting their all-time highs even in the midst of elections, rupee is one of Asia’s best performing currencies and yields on the government securities have fallen. So far, in 2019, inflows from foreign institutional investors in India have been the highest among emerging markets. March saw the highest foreign funds flow in two years – Rs 48,000 crore. It slowed in April due to a pressure on global crude prices but only after the year-to-date foreign fund flows reached $10 billion.

Why are the markets holding on despite election season ?

Strange though it may sound, elections in India do not spur volatility in the market. It is always the outcome that does. The data from the past four general elections shows stocks have gone more volatile after the poll results. This year too, India’s volatility index has come down closer to elections. The fact that the Reserve Bank of India has delivered two back-to-back interest rate cuts, has spurred sentiments.

Among other things, it is positive for real estate sector, which was looking for some stimulus to perk up sales. Markets may have sensed there is a broad commitment to reforms that are going to continue irrespective of which government comes to power. Emerging markets, including India, have also gone bullish after the US Federal Reserve kept its key interest rates unchanged earlier this week. A rate hike would have led to fund flows to US market, it would have triggered capital defaults as high interest rates would have made it difficult for companies to service their debt on loan taken from US and also resulted into weakening of Indian rupee. The recent move by US Fed is positive for market sentiment.

A recent RBI survey had indicated that policy shocks like demonetisation and GST, for which India’s businesses were not prepared, impacted high decibel sales including that of automobile. That led to the index of auto companies shed a lot of weight on Sensex. Same was the case with many other companies, which led BSE’s 30-share benchmark Sensex perform poorly under the five-year Modi rule. Sensex could go up only 56% as against 63% under UPA-II.

Despite all odds -- like global recession, coalition government and a correction during allegation of scams -- the UPA did better as earnings of India’s corporates were higher. During Modi’s tenure, the demonetisation hit the GDP by almost 2 percentage points, which coupled with the crisis in India’s banking, ultimately led to the decline in the corporate earnings.

A DH poll of 25 Chief Executive Officers (CEOs) of listed companies across in the midst of elections showed, most of them held demonetisation as a great cause for slowdown in businesses and none of the CEOs agreed that there was any improvement in the ease of doing business environment. Over 90% thought Modi’s rule has been fiscally prudent.

Demonetisation imposed a large cost on a wide cross-section of people, according to Arvind Subramanian, who was Modi’s Chief Economic Advisor at the time when he announced the note-ban in November 2016. Apparently he was not consulted before such a big decision was announced. Of late, an RTI query has revealed that even RBI was only told about the move.

It appears, markets are waiting for a stable government with less of policy shocks whether it is UPA or NDA.