Markets
Sell sell? Why the market doesn’t like the poll results
Summary
- The equity markets have swung like a see-saw in just three trading sessions. What's next?
The BJP-led NDA scored a victory in the Lok Sabha polls, but the saffron party was unable to secure a simple majority on its own. The age of coalition politics is back and this queers the pitch for the market in the short term. Mint explains why.
Why are investors jittery?
The Indian stock markets was counting on a 350-plus seat victory for the BJP and 400 for the NDA. But, unlike in the earlier two Lok Sabha polls, the BJP failed to get even a simple majority of 272 seats, and the NDA won only 291 seats. This would make the Modi 3.0 government reliant on Chandrababu Naidu and Nitish Kumar who joined the NDA only in the past six months. There is also a feeling that the new government would have to resort to populist measures to address the distress faced by rural voters in states like Maharashtra, where assembly elections are due in six months.
Also read: Will markets' focus turn to earnings, finally?
What could this mean for stocks?
Many of the ‘Modi stocks’ plunged on Tuesday, eroding ₹31 tn investor wealth, the biggest-ever absolute loss. Among them were stocks of public sector units like NTPC, infra and capex plays like Adani Ports and L&T, O&G (Reliance), which went through re-ratings premised on economic continuity and political stability. These stocks could now be under pressure with brokerages like CLSA replacing L&T with HCL Tech in its India focus portfolio. ‘Defensive’ sectors like consumer goods, pharma and IT could gain. Kotak Institutional Equities has eliminated capital goods stocks and PSU banks from its model folio.
What could fuel a continued correction?
Any delays in fast-tracking of projects like Bullet train slated for August 2026 or Navi Mumbai International Airport by March 2025 could sour market sentiment. Even after Tuesday, markets trade at a one-year forward price to earnings multiple of 19 times, a 19.5% premium to its 18-year average. This makes valuations vulnerable to a pullback if uncertainty rises.
Also read: Slender win for NDA queers pitch for Street, investors lose ₹31 trillion
How are investors positioned now?
As of April end, equity assets of foreign institutional investors (FII) equity stood at ₹66.28 trillion while those of mutual funds were at ₹24.78 trillion. Mutual funds are domestic institutional investors or DIIs. To protect their holdings, FIIs and DIIs hedge themselves on the equity derivatives segment of NSE, the world’s largest derivatives exchange. On Tuesday, FIIs were net short 355,379 index futures contracts (Nifty and Bank Nifty) while DIIs were net long 10,346 contracts. This means FIIs are very cautious and DIIs bullish.
How will the market move now?
FIIs, sitting on $800 billion of assets, sold Nifty and Bank Nifty Index futures on Tuesday in response to the poll results. On Wednesday, they appear to have covered some of their derivatives bets, enabling the Nifty to recoup over half of Tuesday’s losses. Excluding the wild swings of the past two days, Nifty closed Wednesday just 90 points above Friday’s closing. Markets could rise a bit more before portfolio allocations, likely on Saturday. The movement will depend on how the ministries are allocated.
Also read: 3 stocks that promoters bought during the market crash post election result
