MUMBAI: After the verdict to the month-long elections are announced Saturday and horse trading begins on the political race course to establish the governing coalition, Indian investors will have a clear direction on where the markets will head.

Market players are of the view the election outcome may be a non-event for markets as long as BJP or a Congress led alliances is in power as investors will likely be reassured of stability in terms of government as well as policies.

“We are not concerned about who will form the coalition but we need a stable government formed by BJP or Congress at the center. Though exit polls indicated that there may not be significant seats for Third Front, yet we are cautious and remaining on sidelines till the actual verdict gets unveiled,” said Sushant Marathe, fund manager at Connoisseur Wealth Advisory.

“We also believe market will not be affected as long as it is seen that the coalition led by NDA or UPA is stable and there are no probability of major policy reversal. However if the Third front comes to power, the market may re-test lows of 2009,” Marathe added.

Four possible outcomes are expected – UPA with Left, UPA without Left, NDA or the Third Front. However, the last outcome seems highly unlikely going by the exit polls. Analysts predict the impact on the market based on these possibilities.

Hitesh Agarwal, head of research at Angel Broking said, “The most favourable option for the markets is the emergence of the NDA, in which case, we will see investors rejoicing with a 10 per cent on the cards which is expected to last for a fortnight. But in the case of UPA (with or without Left support), we could expect the markets to move in a +/- 5 per cent range. We will see the markets consolidating.”

Agarwal added, “As per the exit polls, the Left seems to have weakened in the number game and hence they will be left with hardly any bargaining power which is beneficial for the markets. In the unlikely possibility of the Third Front coming to power, the markets will definitely tank at least 20 per cent.”

Market players are of the opinion that the first two days of the forthcoming week will see high amount of volatility. Given that a lot of FII money is waiting on the sidelines, they will begin entering at lower levels.

In the run-up to the verdict, Bombay Stock Exchange’s Sensex settled at 12,173.42, higher by 2.5 per cent or 296.99 points from a week ago. National Stock Exchange’s Nifty ended at 3671.65, up 50.95 points or 1.4 per cent compared to the week ended May 8, 2009.

Exit polls have forecasted the Congress-led coalition to be leading the opposition NDA. However, India’s elections are extremely hard to predict and most exit polls in the last couple of general elections were off the mark.

But fund analyst Rajesh Kumar at DBM Wealth Management sounds caution. “If the Third front gets seats around 130-140, it will be extremely crucial for major parties to form government without taking support from third front. And in that case the Third front will have the highest bargain power which will also see as a negative factor from the markets point of view.”

“The difference between the Congress-alliance and the BJP-alliance won’t be very big. So it will all depend on the alliances they form now. We may even see the Third Front emerge if there is no consensus between the big parties. There is a fair chance that might happen. There’s going to be a lot of uncertainty in terms of the political outcome. But the market has shown surprising resilience. A decisive majority seems to be eluding us and this may make markets a bit nervous. The edginess in the markets may prevail for the next few days,” said Anita Gandhi, head, institutional business at Arihant Capital.

Gandhi added that the undercurrent in the market is still strong and as long as a stable government with no negative surprises emerges, it augurs well for the Indian bourses. However, she feels that the sustenance of any market rally will still depend on the global market scenario. For now, if the election results are favourable for the markets, then 3800 on the Nifty is an immediate target.

On similar lines, ICICI Securities in a note said, “In the short-term we believe the outcome of the general elections will play out in the markets. Any favourable outcome may extend the current rally while any adverse outcome may cap the gains
leading to a correction. However, we believe the markets will consolidate.”

Considering the past relation between elections and stock market returns, for the past few elections there was no exact set pattern. The returns in the run up to the elections have been lackluster except the current one. Markets, generally in all the occasions, have shown range bound trading or sideways movement.

Twelve month return post elections have been positive on four occasions and marginally negative on three occasions. 1984, 1989 and 1991, the market rallied nearly 90-140 per cent in the first year of the government.

However, after 1996 a significant change was witnessed on the political front in India with the coalition government took power for the first time. The stock market returns in that period were very low where for the three times out of four markets gave negative returns in a year’s time after formation of government.
source: Economictimes

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