Sensex closes at new record high. Will its winning streak continue after polls?

Another day, another market record broken. The BSE’s Sensex and NSE’s Nifty both ended today at record highs: the former closed at 22,722, while the latter finished at 6,802. Investors have been buoyed by various opinion polls predicting a Modi-BJP win in the ongoing 2014 Lok Sabha elections.

According to some experts, the ‘Modi mania’ in the markets could continue for some more time. In fact, the market gains we’re witnessing now could just be the start of something much bigger.

In a recentUBS report titled_‘India Market Strategy:Politics - Decoding opinion polls’,_the brokerage predicts the Nifty could touch 6,900 “if markets start believing in a positive election outcome.” It also states that currently, despite the markets daily breaking records, investors have not yet factored in a positive election outcome.

Whoa! So if investors become convinced that the BJP will come to power, they could drive the markets much, much higher. For sure, the opinion polls seem to be pointing to a BJP win.

But is it safe to put your eggs in the opinion polls’ baskets? Not if the past is any indicator.

In the last two general elections in 2004 and 2009, opinion polls got their numbers wrong and market predictions also went for a toss, a recent report by JP Morgan points out.

The table below shows the trajectories of the Sensex and the Rupee in the days following the 2004 and 2009 election result declarations.

In 2004, mostpolls had predicted that the incumbent BJP wouldreturn to power with an even greater majority. The prediction was that it would win a minimum of 240 seats. The BJP eventually wound up with only 180 seats. That shocked pollsters, the markets and the rupee.The Sensex crashed 11 percent one day after the election results, while the rupee lost 3 percent of its value in the election month, the report said.

It’s a similar story for 2009. The Congress was predicted to win between 200-225 seats, but it beat all expectations by winning 262 seats. Again, no one predicted that.Equity markets rallied awhopping 17 percent in one day, triggering circuit-breakers, while the rupee surged 4 percent in the election month, the report noted.

The moral of the story is that no one really knows what will happen to the stock markets after the elections. Will foreign investors continue their love affair with India? So, far, they’ve been exuberant in their affections, pouring more than $4.5 billion in 2014.

As a result, it’s been smooth sailing for the markets these past few months, notwithstanding a sluggish economy and persistently high inflation.Yet if the elections results in May don’t match predictions, markets could be in for a rocky ride.