Enter poll results, exit market rally?

Will the euphoria in the stock market continue even after the results are out and the next government is formed, presumably by Narendra Modi if one were to go by the exit polls? This is the question on top of the minds of brokers, investors and companies that have a huge stake in the markets. A 1,421-point rally in Sensex on a single trading day after the exit polls predicted a victory for BJP/NDA in the Lok Sabha polls resulted in a bonanza for investors — an over Rs 5.33 lakh crore accretion in the value of stocks. The Nifty logged its best gains in 10 years. On the surface, the rally may look like the market is betting on a Modi encore. There’s already feverish talk that Sensex may hit the 42,000-mark in the next two months.

The optimism in the markets in the last three months may be a bit of an over-reaction to the possible re-election of Modi as prime minister. Speculation and punting seem to have taken over as both domestic and foreign funds make merry during unscientific bouts of rally in the markets. Typically, periodic market rallies lead to profit-booking and 100% repatriation by foreign funds that have invested big in the Indian markets. More than the small and retail investors, it’s the big boys’ game that seems to have pushed up the market, before and after the exit poll results hit television screens two days back. Is this reaction justified and sustainable? Heated and sentiment-based rallies are neither based on economic fundamentals nor are sustainable in the long run. Apart from the Modi factor, several market players attribute a surge in Indian stocks to the relatively weaker performance or returns foreseen by foreign funds in other emerging markets. Secondly, the US-China trade wars seem to have forced funds to shift their investments into relatively safer destinations like India. Thirdly, the global slowdown, especially in the advanced and larger developing economies, seems to have made India a relatively better bet.

If market men are to be believed, the huge rally seen on Monday may not last long, unlike following Modi’s emphatic victory in 2014. The weakness in industrial growth, resulting in lower earnings, may not allow companies to write out huge dividend cheques or project big growth numbers for the near future. Lower-than-expected capacity utilisation, sluggish pick up in consumption demand, and non-recovery of the investment cycle could all make the markets subdued. Also, the new government could into run into big fiscal challenges that may not be easy to overcome. Lower household savings could bring the markets to their knees with an economic slowdown dampening the spirits. Caution should be the buzzword for investors who have low risk appetite.