 "Analyst view: Who will win election and what it means for stock markets")
Both BSE Sensex and NSE Nifty rose to their fresh all-time highs on Monday, as foreign investors lapped up banks, power, oil and gas and realty stocks since opinion polls are largely predicting a business-friendly Narendra Modi-led Bharatiya Janata Party (BJP) at the centre.
Foreign institutional investors are hopeful that if Narendra Modi comes to power, he will replicate the Gujarat growth model in India.
While the BSE Sensex hit a new life high of 22,040.72 today, a Reuters poll last week forecast the index to rise further to 23,000 by the end of June.
The Sensex has already risen 3 percent this year, with foreign investors pouring in nearly $2 billion after ploughing in more than $18 billion last year.
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Madan Sabnavis,chief economist at CARE Ratings in Mumbai, expects the markets to move up until election results are announced and the euphoria to last for another month or two after, until the budget is announced.
RichardGibbs of Global Head, Macquarie Securities too sees another 2-3 percent upside before the inevitable consolidation. “The expectation of BJP forming the next government is awarming the hearts of investors,” he told CNBC-TV18 in an interview.
He added that if China’s economic growth trajectory keeps softening then the relative value of India will increase.
Antique Broking sees an 80 percent probability of the NDA forming a stable government with the support of a few large regional parties such as AIDMK and TRS, without materially compromising its agenda.
In such a situation, Modi will get the top job, which will be in line with broad expectations.
“We believe that this will meaningfully improve ‘business confidence’ and boost investment cycle, leading to higher GDP growth in FY16 onwards. We strongly recommend increasing weightage in cyclicals; Buy private banks, industrials, automobiles, cement, and NBFCs (industrial lenders),” the brokerage said in a note.
The brokerage’s top picks include Tata Consultancy Services, ICICI Bank, Larsen & Toubro, Maruti Suzuki, Lupin, Tech Mahindra, Bharat Petroleum Corporation, IndusInd Bank, Shree Cement, Eicher Motors, Cummins India, Shriram Transport Finance Company, Crompton Greaves, Supreme Industries and Gujarat State Petronet.
However, investors seem to be over-relying on a mere regime change and may be in for a rude shock because even if Modi comes to power he does not have any magic wand that can bring the economy back on track overnight.
Recently, Sidharth Birla, president of Ficci was quoted by MK Venu in a Firstpost article as saying that “whichever government is in place will have to deal with multiple legal and bureaucratic disputes over allocation of natural resources such as coal, iron ore etc. Unless all stakeholders-political class, judiciary, bureaucracy - sit together and resolve outstanding issues it is unlikely that sustained growth will come back.”
Last week, brokerage Credit Suisse also noted thatan election verdict in favour of the Bharatiya Janata Party wouldn’t help kick start investments, as only a quarter of the stalled projects required clearance from the Centre.
But the biggest risk before the markets is the possibility of the elections delivering a fractured mandate.
Citi Research in a recent report said that if one looks at the track record of opinion polls in India, they have been “modest on reliability”. The polls at best capture the shift in momentum as one got closer to elections.