The benchmark indices ended with losses, even as the Narendra Modi-led Bharatiya Janata Party (BJP) was set to record a landslide win in the general elections. The higher-than-expected seat tally for the National Democratic Alliance (NDA) triggered aggressive buying in early trade, taking the Sensex and Nifty past 40,000 and 12,000, respectively, for the first time ever. The indices, however, gave up all gains in the last hour of trade as investors fret over economic slowdown, sluggish earnings growth, and expensive valuations.
The Sensex ended at 38,811.4, down 299 points, or 0.8 per cent over its previous day’s close. The index dropped 1,314 points, or 3.27 per cent, from a record intra-day high of 40,125. In terms of points, this was the biggest intra-day slide since January 2008. The Nifty fell 81 points, or 0.7 per cent, to close at 11,657, after climbing to 12,041 earlier in the session.
The rupee ended at 70.02, 0.35 per cent lower over its previous close of 69.67 to the dollar. The 10-year government security closed at 7.24 per cent, compared to previous close of 7.26 per cent.
“The election result, in essence, is a clear status quo scenario, given the continued BJP majority. From a market perspective, the result removes uncertainty and infuses political stability. Longer term, the big question is whether NDA 2.0 would be materially different from NDA 1.0,” said Prabhat Awasthi, Head (India), Nomura.
Profit-taking emerged at higher levels amid weak global cues, as investors had largely priced in an NDA victory after the exit polls, said experts. On Monday, the benchmark indices had rallied close to 4 per cent, their biggest single-day gain in six years, after most exit polls indicated that Modi will retain power with a comfortable margin.
“Investors who took positions ahead of the election outcome unwound their positions,” said Anand Radhakrishnan, managing director and chief investment officer at Franklin Templeton India. “The election verdict comes in the backdrop of the earnings season and results commentary that hasn’t been strong. Investors will be in a wait-and-watch mode before taking aggressive positions. More broad-based earnings growth is important for wider recovery in the market.”
Wild swings are fairly common following election results, but Thursday’s range of 3.3 per cent, in comparison, was narrower than the previous two occasions.
From a valuation standpoint, there is little legroom for the markets to rally sharply from current levels, say experts. The benchmark Nifty is currently trading at 18 times its one-year forward earnings estimate, higher than the 10-year average of 16 times. Besides lofty valuations, markets also face challenges both on the domestic as well as the global front.
“The next two quarters look challenging. There are concerns over the monsoons and its impact on the rural economy. In addition, the revival of non-banking financial companies is critical for the automobile sector demand, and for the overall earnings growth revival. Budgetary allocation towards capital and revenue expenditure will be important to watch,” said A Balasubramanian, chief executive officer of Aditya Birla Sun Life.
The fall in mid- and small-cap indices was relatively lower, at 0.2 per cent each. The India VIX, a gauge that measures volatility, plunged 29 per cent. The index had surged to four-year highs on account of uncertainty surrounding the results.
FPIs bought shares worth Rs 1,352 crore, while their domestic counterparts were net sellers to the tune of Rs 594 crore. This week, FPIs have bought shares worth nearly Rs 3,000 crore.
Foreign brokerages said the election outcome would be positive for the markets and economy. In a note, Morgan Stanley said it expects low food prices, lower inflation, fiscal consolidation, infrastructure spending, focus on FDI, and strong foreign policies after Modi’s return. The brokerage expects the Sensex to climb to 45,000 and the Nifty to top 13,500, by June 2020.
Goldman Sachs in a note said: “Going forward, we see potential structural reforms focusing on four key themes land, labour, privatisation and export promotion.”