Markets fall in poll season 1st time since 2004

Indian shares have had their worst election season in 15 years, but the weakness is due more to an economic slowdown and international factors such as the US-China trade war than nervousness about the poll result.

A DH analysis of the past five elections reveals that the loss of 1.7% in the Bombay Stock Exchange Sensex benchmark over the six weeks of electioneering has been the second-highest loss after markets declined by 4.2% ahead of the 2004 polls, when the BJP-led National Democratic Alliance (NDA) ceded power to the Congress-led United Progressive Alliance (UPA).

This loss would have been much worse hadn’t it been a 537-point gain on Friday driven by a rise in shares of carmakers and non-banking financial companies, which have been hammered of late. Analysts said that investors were buying these shares because they expected them to rise on Monday, the first trading day after exit poll results on Sunday.

While markets broadly want a stable government led by the BJP, analysts expect that even if this happened, an uptick would be relatively small and short-lived.

"The earning numbers are disappointing. So the valuations are taking hit. Given the fundamentals, even if BJP wins close to 300 seats, my estimate is that markets won't gain more than 3-4%," said Rahul Shah, vice president, Equity Advisory Group.

The short-term outlook could actually be worse: Three analysts DH spoke to expected the exit polls to give around 240 seats to the BJP, and for the actual numbers to come in lower when votes are counted on May 23.

In the early part of the 2019 season, markets had adopted a wait-and-watch strategy, given that the election was considered a close one. But then poor company earnings and a bleak outlook for the coming quarters, coupled with geopolitical tensions such as US-China and an escalation in tensions between the US and Iran, hit shares.

If you exclude Friday, Indian shares underperformed global stocks during the election run-up. Morgan Stanley's World Index (MCWI) fell by 1.75%, compared to a 3.1% fall in the BSE Sensex.

During the 2009 elections, opinion polls had predicted the return of the UPA and in the run-up, markets rejoiced by gaining 6.55% on the hope of the policy continuity.

Again, in the 2014 general election, when the country was riding a Modi wave, the markets, certain about a clear majority for him, surged by 5.33% during the election season.

Another feature of the run-up to this year’s election was the high degree of volatility in shares. The Bombay Stock Exchange’s Sensex benchmark oscillated in a broad 7.6%-range from 37,000 to 39,200 points.