Mumbai: Indian stocks are likely to get a boost when trading opens on Friday as investors cheer the likelihood of the Bharatiya Janata Party (BJP) emerging as the single largest party in Uttar Pradesh—a possibility signalled by exit polls.
Still, some analysts advised caution, pointing to the 7.7% rise in the Vix volatility index in the past four trading sessions and high stock valuations.
As the final phase of polling ended on Thursday in Uttar Pradesh and Manipur, bringing the curtain down on elections to five state assemblies, at least six exit polls predicted the BJP will end up with the largest tally of seats in UP, India’s largest and most populous state, even if it falls short of a majority.
“Markets might react positively tomorrow (Friday); however, investors should wait for the final numbers to take a call,” said Vaibhav Sanghavi, co-CEO of Avendus Capital Public Markets Alternative Strategies LLP, a hedge fund.
Votes will be counted in the five states and results known on Saturday. Exit polls were in favour of the BJP winning in Goa, Manipur and Uttarakhand as well. The Congress was tipped to win in Punjab.
So far this year, the Sensex and Nifty have gained around 9%, compared to an 8.4% rise for the MSCI Emerging Markets index. With earnings estimates being pared, the current rally has received a leg-up from a liquidity surge. Foreign institutional investors have bought $2 billion of Indian stocks in 2017 after selling $4.6 billion in the last three months of the previous year.
“The market is more concerned about BJP increasing its vote share in UP even if it does not manage to get a majority in the Hindi heartland,” said Pankaj Pandey, head of research at ICICI Securities Ltd. He sees a 5% correction in the markets if the outcome of the assembly elections doesn’t favour the ruling party at the centre.
To be sure, exit polls don’t always get predictions right. The 2004 and 2009 Lok Sabha elections are the most famous examples of the pollsters getting it completely wrong.
“The market is heavily banking on BJP winning Uttar Pradesh elections and a hung assembly situation may kick-start a much-needed correction in the market,” said Ajay Bodke, CEO and chief portfolio manager, portfolio management services, at securities house Prabhudas Lilladher Pvt. Ltd. “The markets are teetering on edge of nervousness and hoping for the BJP to win. Scope of the markets’ disappointment is large if BJP loses on 11 March since investors will be worried about the government taking more populist measure to prepare for the general elections in 2019.”
Yet, others such as Dipen Shah, senior vice-president and head of private client group research, Kotak Securities Ltd and Abhijeet Dey, a senior fund manager (equities) at BNP Paribas Asset Management Co., believe the exit polls may not evoke much of a reaction since current prices have already factored in a BJP win.
“The numbers from exit polls indicate either BJP winning or a hung assembly. The market has moved up in the anticipation of a BJP win, and that possibility is discounted,” said Shah.
While traders haven’t built up any hedges or bought downside protection against an adverse election outcome, as Bloomberg reported on Tuesday, there has been an increase in investor nervousness around the time the markets hit a two-year closing high earlier this week.
In the last four trading sessions, the India VIX has gained 7.7% to close at 14.39. on Thursday; benchmark indices closed little changed.
The increase in valuations is adding to caution. That this rally has been liquidity-driven can be seen in the simultaneous rise of the Sensex’s forward price-to-earnings multiple. The Sensex is currently trading at 16.86 times estimated earnings for fiscal 2018, a tad above its five-year average.
In any case, if liquidity continues to flow in, the markets may well shrug off any disappointment and move on to other triggers, said experts.
“The liquidity flow is coming in through the mutual fund route, and that will support the market,” said Gautam Trivedi, CEO of Religare Capital Markets Ltd. Stable global markets and recovering commodity prices are also supporting factors, analysts say.