Exit polls and markets: Beware! Play the expected euphoria with caution

It will be interesting to see how the new government will generate additional revenues to fund populist schemes already announced without dampening the market mood.

Markets remained highly volatile during last week with the Nifty conquering the 11,400 mark after threatening to go below 11,100 early in the week. It started the week on a pessimistic note, after IIP contracted to 0.1 per cent in March 2019, the lowest in 21 months. Continued selling by the FIIs ahead of the General Election outcome and the prevailing trade war tensions between US and China kept the market nervous. Sentiments got further hit after Indian Met department’s announcement of a late arrival of monsoon, dampened the early revival prospects of consumption focused sectors.

However, later in the week, sentiments improved after comments from U.S. President Donald Trump that he has decided to delay tariffs on auto imports by up to six months resulting in the trade war tensions easing a bit and finally Markets got a second booster from the supposedly leaked outcome of the Exit Polls predicted a Modi win.

The Exit Polls on Sunday evening revealed a smooth win for BJP-NDA with a median of about 300+ seats. The markets have given this probability a thumbs up with a gap up opening of 250 points on the Nifty and 850 points on the S&P BSE Sensex.

One needs to see whether this sustains as the final outcome rolls out on May 23. Except for 2004 where the margin of error of all the exit polls went horribly wrong, rest of the election years from 1998 were fairly consistent in terms of the direction. However, looking at the margin of victory as per the exit polls, it seems BJP-NDA will sail through even if one would assume a 10 per cent margin of error. Assuming that it’s a comfortable victory for BJP-NDA, we could see the up move converting into euphoria as the foreign institutional investors (FIIs) may again make a beeline to invest in an economy where there is political stability and visibility. It would have also caught the naysayers on the wrong foot with short sellers running for cover. All those sitting on the side-lines would be forced to jump in lest they miss the rally.

After the initial festivities, the marketmen and especially the FIIs, would look to see how Modi 2.0 will kick start the consumption cycle, improve trade deficit, provide employment opportunities and deal with farm distress. A “Damocles Sword” hanging on the NBFC sector needs to be handled deftly and swiftly lest it engulfs the economy into another rut like what Banks’ NPA did in the last two - three years. Real Estate is another elephant which is groaning under its own weight of unsold inventories and unserviceable debt. And globally President Trump’s attention may turn towards emerging markets, especially India, after China has been tamed.

In the last five years every trick in the book has been utilised to garner funds from the PSUs, most of which have been milked of their accumulated cash flows and in some cases the future cash flows, too. One needs to see how the new Government will generate additional revenues to fund the populist schemes already announced without dampening the market mood. Thus the choice of the new Finance Minister would be keenly awaited and someone - like Mr. Piyush Goyal - may be cheered by the markets. There would also be fresh expectation built up for the full-fledged Union Budget of the new Government sometime in July.

However, one needs to look at the harsh reality at the ground level and play the expected euphoria with caution.

Ambareesh Baliga is an independent market analyst. Views expressed are his own.