Stock Markets
Sensex: 23,905.60 and NIFTY: 7,123.15 (At closing on 15th May, 2014)
During the last general election in 2009, Congress won a greater than expected number of seats, and the Indian stock markets rose 17% over the two days following the election result. In the previous general election in 2004, when the BJP unexpectedly lost, the markets fell 17% over the two days after the election results.
Although volatility on election day has always been the norm. The way I see it, its all going to be about the NDA. 270 seats for NDA are already priced in. Shouldn't see more than 5-10% rise tomorrow if that happens. We can expect a slightly higher upside if they cross 300. Downside in the market if they get less than 230 seats and anything even lesser would mean Hide Yo Kids! Hide Yo Wife! from the stock market.
Why are the markets are so pro-NDA?
Well, its all about expectations really. But if you really want to get into it. A stable government will have more of a free-hand to enact its policies rather than be stymied down by a powerful opposition. But what sets NDA as the current flavour is their Centre-Right tendencies.
You see, over the last 10 years, we have witnessed what can be classified as Centre-left economic policies wherein there was a large scale enactment of Entitlement programs and other welfare policies.
People be pissed that we do such stuff when our fiscal deficit is so damn high (Fiscal Deficit, is in simple words, The excess of goverment expenditures over revenues. It was at 4.9 percent of the GDP during 2013-13. The original target was to have it no more than 3%. But shit happened.)
And then ofcourse, there's stuff like inflation that's been bothering us all and the low economic growth rate which has been bumming us out. The TL;DR of all of which is loss of faith in the current government.
Combine that with the fact that investors perceive Modi, as pro-business, market-friendly politician and a tough administrator, we have euphoria all around if he becomes the PM.
You already probably know that the Sensex and the NIFTY have been rising quite a bit these past few weeks. However, the buying of stocks was led primarily by foreign investors while domestic investors continued to be cautious. What domestic investors know all too well is that coalition politics in India can lead to unstable alliances, in which politicians with regional strongholds can block reform measures and threaten to pull out of the government at a moment’s notice. Which is probably why, domestic institutional investors have been net sellers in the market for nearly every month since September, except February. Also, low growth in the economy and high inflation has reduced confidence in the economy and shrunk the savings pool for domestic investors, leading to a more risk-averse attitude. These guys are likely to return to the Indian market only once the new government gets established with confidence improved.
What stocks to watch out for?
Remember first, a lot of analysts believe that the Sensex is currently overvalued at its present levels already. Even if it goes higher than 10% after elections, it is highly likely to come back down just as soon because people will start to book profits. The next couple of days will see quite a bit of volatility which will NOT be a reflection of fundamentals.
About timing the market on election day, I cannot help you here because I am not an active trader. Feel free to start a comment thread on stocks that you are watching out for.
In the long run though, I see a lot of analysts claiming to go bullish on banking and infrastructure stocks.
Assuming a stable government, we are looking at the Sensex reaching 25000 levels by the end of the year.
