Exit Polls Favoring Opposition Add to Indian Stock Market Rally …
Indranil Mukherjee/Agence France-Presse — Getty ImagesA stock trader monitoring share prices in Mumbai, Maharashtra, on Monday.
MUMBAI, India — The benchmark Indian stock market indexes rose to a third consecutive record on Tuesday after exit polls forecast that the opposition Bharatiya Janata Party would win with a large majority, making Narendra Modi, a leader with a business-friendly reputation, the next prime minister of India.
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The surge in confidence in the Indian stock markets was driven by a widespread belief that a B.J.P.-led coalition is likely to secure more than 272 seats out of the 545-seat Lok Sabha, or lower house of Parliament, giving it a governing majority that would elect Mr. Modi as prime minister.
The Sensex crossed 24,000 points for the first time, rising 2.2 percent, or 516.92 points, to 24,067.92 shortly before noon. The NSE Nifty was at 7,165.75, up 151.50 points, or 2.2 percent.
However, the buying of stocks was led primarily by foreign investors while domestic investors continued to be cautious. What domestic investors know all too well is that coalition politics in India can lead to unstable alliances, in which politicians with regional strongholds can block reform measures and threaten to pull out of the government at a moment’s notice.
Analysts say that a decisive mandate would allow Mr. Modi the discretion to make policy changes without being stymied by coalition partners.
“The last term of the Congress-led governing coalition was marred by the houses not working, the opposition not allowing certain reforms, minority coalitions blocking a few other reforms, so that hardly any progress was made,” said Amisha Vora, joint managing director at Prabhudas Lilladher Group, a Mumbai brokerage.
Ms. Vora contended that one of the weaknesses of the Congress government was the division of power between Prime Minister Manmohan Singh and the party’s president, Sonia Gandhi, which weakened the decision-making power of the party, while the power within the B.J.P. will be highly centralized if the exit polls are correct. The results of the vote come out Friday.
While domestic mutual funds are also optimistic about the Indian stock market, foreign institutional investors have largely driven the current rally in the market. With the exception of January, foreign institutional investors have been net buyers in every month since Mr. Modi announced his candidacy in September.
Analysts say foreigners are drawn to a market that is outperforming other emerging economies like China and Russia, and these investors also have more liquidity available to them, thanks to low global interest rates in the West.
Meanwhile, domestic institutional investors have been net sellers in the market for nearly every month since September, except February.
“Domestic participation in the market is still very low, and domestic investors have been selling out of whatever they have been holding in every market rise,” said Rajat Rajgarhia, managing director of institutional equities at Motilal Oswal Securities in Mumbai. “Very low growth in the economy and high inflation has reduced confidence in the economy and shrunk the savings pool for domestic investors, leading to a more risk-averse attitude.”
He added that domestic investors were likely to return to the Indian market only once the new government was established and growth improved, while for foreign investors the current trend was a “continuation of their own faith in the India growth story.”
Over the past few months the Indian stock markets have repeatedly risen to new highs on expectation of a change in government, as opinion polls increasingly pointed to a resounding loss for the governing Congress party. The stock market rose to a then-record high on Dec. 9, after the B.J.P. performed well in state elections.
The opposition party emerged as the clear winner in Madhya Pradesh and Rajasthan, secured a majority in Chhattisgarh and won the most seats in Delhi, although the Aam Aadmi Party’s surprising strength there allowed it to form a coalition government. Since then, the Indian stock market indexes have risen about 12 percent.
“There was a brief fall in the market after the state elections when the Aam Aadmi Party came into focus and doubts were raised whether the B.J.P. would be able to secure a majority,” said Dipen Shah, head of private client group research at Kotak Securities.
However, he said that now the “A.A.P. effect” had moderated and was no longer a concern for investors, who now expect a stable government.
While the Indian economy is struggling with weak growth and elevated inflation, investors are hoping that a change in leadership and a decisive political mandate will help turn around a flagging economy. Mr. Modi has made a great effort to fashion himself as being development-oriented and welcoming to businesses, making repeated mention in his speeches and at rallies of bringing manufacturing to India and creating jobs.
Mr, Modi’s touted economic success in the state of Gujarat, where he is currently chief minister, has been questioned by his critics, who argue the state was already performing well before Mr. Modi took the helm and that the growth rate achieved there cannot be replicated in the rest of the country. Critics of the Gujarat model also argue that while the state has been growing at a faster pace than the rest of the country, it has lagged behind on social indicators of development like child nutrition and maternal mortality rates.
However, investors look favorably upon his reputation for swift decision making and increasing the ease of doing business in the state of Gujarat.
“The markets are expecting that a stable government will re-initiate the reforms process with increased vigor, creating a multiplier effect in the economy and leading to growth in investments, consumption and income, and hence higher valuations in the stock market,” Mr. Shah said.
But analysts said that because the current stock market rally is driven largely by expectations of a strong B.J.P.-led government, the market could quickly turn down if the exit polls turn out to be wrong, as they were in 2004 and 2009.
“If the final verdict is on the same lines as market expectations, then the rally will sustain,” Ms. Vora said. “If Narendra Modi doesn’t become the prime minister, then the risk is high that there will be a big fall in valuations and the market will fall significantly. If the B.J.P. does not have a governing majority and they need support from outside making them vulnerable, then also the market will correct but less.”
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Exit Polls Favoring Opposition Add to Indian Stock Market Rally …
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