Indices drag after sharp sell-off in equities as participants turn cautious ahead of 23 May
The markets are pricing in a clear victory for the NDA and any disappointment on 23 May could lead to correction
India’s record exit poll rally fizzled out on Tuesday, declining the most in over a week after investors grew cautious ahead of the 23 May general elections verdict.
The benchmark Sensex and Nifty lost nearly 1% on Tuesday after sharp sell-off in equities dragged markets. The Sensex ended at 38,969.80, down 382.87 points or 0.97%, while the 50-share Nifty was at 11,709.10, down 119.15 points or 1.01%.
Following a robust rally on Monday, the benchmark indices witnessed profit taking at higher levels due to nervousness among market participants ahead of the election results. The markets are pricing in a clear victory for the National Democratic Alliance, and hence, any disappointment on 23 May result day could lead to a correction. Analysts said that there seems little room for a further rally before 23 May.
Global markets were mixed on Tuesday as a temporary respite in US-China trade tensions provided support. Markets in China were higher while Japan and Hong Kong ended lower.
Gautam Shroff, co-head, institutional equities at Edelweiss Securities said, “Lack of follow-up buying dragged the markets today. There is scepticism among investors as exit polls have not always matched the final results in 2004 and 2009. I believe markets will rally once the verdict is out. A stable government does deserve some premium. Foreign investors will pump in money only after the verdict."
Shroff said the exit poll results were a mood changer after prolonged gloom in the markets over factors such as the US-China trade war, a slowdown in the Indian economy and falling auto sales. Besides, there was also some of short-covering, which refers to buying back borrowed securities in order to close open short positions at a profit or loss.
“Real buying will be seen on 23 May. However, till then markets will be buoyant but won’t fall off the cliff," he added.
According to analysts at ICICI Securities, the reaction to the exit poll results on Monday was a clear indication of the willingness of the market to err on the bullish side of the forecasts. Indian stocks surged to a record high, showing biggest single day gains in six years on Monday.
“However, our analysis of past three instances of actual general elections results (2004, 2009 and 2014) and exit polls forecasts indicate an average error of 25% with cases of both significantly under-estimating and over-estimating the winning party. Recent large state election results also have had similar degrees of error on either side. In case of a strong mandate on 23 May, the market could get into a bullish environment with wider participation," they said in a note on Tuesday.
Elusive earnings growth and steep valuations have worried most analysts about Indian markets, though the exit polls provided a temporary push to equities. “With markets trading at 18 times forward earnings, we see limited fundamental headroom for any significant re-rating. Overall, we believe that equity seems relatively better positioned than rupee or rates," Goldman Sachs said in a note on Monday.
In the medium-term, Goldman Sachs expects Nifty returns to be largely driven by mid-teen earnings growth, aided by banks, while in the event of a decisive mandate which enables further progress on structural reforms, they expect a faster recovery in the corporate earnings.
However, domestic institutional investors (DII), including mutual funds and insurance companies, are still net sellers of Indian shares. On Monday, DIIs were net sellers of Indian equities worth ₹542 crore while foreign institutional investors (FIIs) were net buyers of ₹1,734.45 crore.
Indian markets have outperformed emerging markets this year so far. In dollar terms, the Sensex has gained 7.98%, MSCI India 6.07% and MSCI Emerging Markets 2.93% in 2019 so far. However, MSCI World is up 11.72% so far this year.