Euphoria whipped up by speculation Narendra Modi-led National Democratic Alliance (NDA) was likely to score a thumping victory in general elections catapulted India’s benchmark stock index above a record 23,000 on Friday, setting the tone for a full-blown bull rally if the results live up to expectations.

The five-week long election, involving an unprecedented 814 million eligible voters, ends on Monday. After the close of the nine-phase voting, television channels will begin releasing exit polls. It would provide an insight into the prospects of political parties and their alliances, and would be the key factor for financial markets next week until the actual results are announced on May 16.

Heavier voting percentage in most constituencies is seen as a tectonic shift for “change”, a euphemism for public anger against the ruling Congress party-led United Progressive Alliance that has controlled New Delhi for the past 10 years and is blamed for the slump in economic growth, policy inaction and rampant corruption.

All opinion polls in the run up to the elections showed the main opposition Bharatiya Janata Party (BJP), which heads the NDA, steadily increasing its influence — bolstered by its 63-year-old charismatic helmsman Modi who leads a highly successful administration in Gujarat for more than a decade.

“Our discussions with investors indicate markets are more favourably disposed towards a Modi-led BJP/NDA government and that his victory is now being assigned increasingly higher probability,” UBS analysts Gautam Chhaochharia and Sanjena Dadawala said in a report dated May 5.

On the ground punters are betting the NDA would grab close to the 272 seats that are needed in the 543-member Lok Sabha, the house of people, to form the next government. If it falls short of the magical number by around 30 odd seats, the alliance would still be in a strong position to cobble together the support of regional satraps and smaller groups.

Record highs

The stocks rally to record peaks on Friday was spurred by expectations that the NDA would get enough seats for the business-friendly Modi to get cracking on policy initiatives to kick-start the sputtering economy into life. The top-30 Sensex soared as much as 3.15 per cent at one stage to 23,048.49, a lifetime high, erasing the previous peak of 22,939.31 set on April 25.

The widely tracked benchmark closed at 22,994.23, up 2.9 per cent on the day. Infrastructure-related stocks and banks were in the forefront of the rise on hopes a Modi-led government would fast-track large projects and clear hurdles. The broader 50-share Nifty ended up 3 per cent at 6,858.80 after hitting a record 6,871.35.

The single-day gains in both the indices were the biggest since last September, underlining the bullish fervour building up.

“The Sensex would surpass 24,000 in double-quick time if Modi and NDA get more than 272 seats on their own,” said independent equity strategist V. Venugopal.

Notwithstanding the euphoria there is reason to be cautious. Opinion polls and exit polls were off the mark in previous elections, and the markets could face a severe backlash if the results put paid to hopes for a Modi government, he said. “In such an unlikely scenario the markets could tumble more than 20 per cent.”

Even while noting the surge in support for a Modi-led administration the analysts at Swiss investment bank UBS were also circumspect.

“Markets may react quite differently to actual outcome scenarios, in the short-term,” they wrote. “Our discussions with investors suggest that a number closer to the 272 mark or more would be taken very positively, possibly euphorically near-term. A number below 220-230 for NDA may be taken negatively short-term.”

“An in-between outcome would create uncertainty and markets may not move as sharply as the other two scenarios immediately, till clarity emerges on the form and leadership of the new government. Recent increased rhetoric from potential allies does imply a potentially higher bar/number for BJP to win to form government.”

Play safe

Amar Ambani, head of research at India Infoline, believes investors should focus on healthy businesses with high margin of safety. “Investment in value stocks is a useful way to tide through the volatility surrounding election outcome and the economic recovery,” he said, citing shares with attractive dividend yields, strong fundamentals and cheap valuations.

As asset quality stress is likely to abate from the second half of 2014-15 on the back of gradual macro recovery, state-run lenders Dena Bank, Syndicate Bank, Corporation Bank, Indian Bank, Union Bank of India, Canara Bank and Bank of India were good buys, he said. Similarly, Coal India and Oil India, Indiabulls Housing Finance, Clariant Chemicals, Balmer Lawrie and Graphite India were also in this category.

Foreign funds have poured a net $6 billion into Indian shares since the start of January, taking their cumulative exposure to more than $151 billion. Recent data shows that emerging market funds were the biggest source of cash, dwarfing global or country-focused funds, flowing into Indian shares. The inflows have outstripped investments in other similar markets such as South Africa and Russia.

Analysts say a proactive stable government after the elections would draw in far larger funds, seeking to ride on an economic recovery and higher returns.

Smart cities

The BJP’s election manifesto promises to build 100 new cities, a pet scheme of Modi who has already set the ball rolling on a project near Ahmedabad in Gujarat. Foreign brokerage Jefferies estimates India would need to invest $2 trillion if it were to create 100 cities each with a population of about 2 million people.

“The creation of these smart cities has the potential to increase India’s annual infrastructure spending by 35-70 per cent across various phases of development from 2015-2045,” said Govindarajan Chellappa, equity analyst at Jefferies.

Among the sectors that would benefit from such a push would be infrastructure and industrial sector, mining, cement and real estate.


The writer is a journalist based in India.