Sensex, unlike in the past, has reacted most positively on Monday to the outcome of assembly polls held in four key states announced on last Sunday. Earlier, Sensex, was either flat or grew marginally, on assembly poll verdicts out during last two years.
Sensex touched the life-time high level of 21,483.74 in the intra-day trading on Monday. Even Nifty hit record high level of 6415 after a gap of 5 years and 11 months.
The buoyancy is largely attributed to the handsome gains made by main opposition party BJP in the verdict. BJP is seen by the stock market as being pro business, especially ever since it announced Narendra Modi as its prime ministerial nominee. The market appears to have also favourably reacted to the emergence of Aam Admi Party (AAP) in Delhi.
Ignoring the past movements, Sensex on December 9 (the results of four key states were announced on December 8) opened with a big positive gap of nearly 420 points. Ultimately, Sensex finished the day with gains of around 330 points closing at 21,326.42 (up 1.57 per cent).
Emergence of the saffron party (BJP) in the four key states is the major reason behind the Sensex rally. Sudip Bandyopadhyay, President, Destimoney Securities, said, “The rally is due to the emergence of BJP and a promise of a stable government at the centre in 2014.”
“Sentiment wise, the news is positive and is helping the markets,” averred Pankaj Pandey, Head Research, ICICIdirect.com.
A ZRG study related to the movements of stock markets post announcement of assembly elections (held in the past two years) revealed that the Sensex either traded flat or registered miniscule gains/losses. For instance, the result of state assembly polls in Karnataka was announced on May 08, 2013. However, Sensex closed with miniscule gains of 0.51 per cent from its last close. The voters had elected Congress over BJP in Karnataka.
Similarly, the results of state assembly elections in Gujarat, Himachal Pradesh respectively were announced on December 20 last year. Then Sensex traded flat and closed 0.12 per cent in the negative. BJP and Congress came into power in Gujarat and Himachal Pradesh respectively.
Furthermore, the results of state assembly elections in Punjab, Uttar Pradesh, and Uttarakhand were announced on March 04 last year. Reacting to the verdict then, Sensex closed minus 1.56 per cent. BJP-Akali alliance returned to power in Punjab while Samajwadi Party (SP) swept UP and Uttarakhand went to Congress in a close finish.
Likewise, when the results of state assembly elections in West Bengal, Tamil Nadu, were announced on May 13, 2011, the Sensex closed with gains of 1.06 per cent. While All India Trinamool Congress (AITC) won the elections in West Bengal, All India Anna Dravida Munnetra Kazhagam (AIADMK) came into power in Tamil Nadu.
But what is so special about the latest rally? It comes in the backdrop of rather bullish recommendations for Modi and his party. Recently, foreign brokerages (Nomura, Goldman Sachs, and CLSA) pointed out that they expect Narendra Modi-led BJP to come to power after the Lok Sabha elections.
CLSA report stated, “The Modi candidacy is not just about crude populism. It is also about marketing the impressive track record in Gujarat over a 12-year period of achieving broad-based growth across the agricultural, manufacturing and service sectors since Modi assumed office as Chief Minister of Gujarat in October 2001.”
Similarly, Goldman Sachs upgraded India's rating to market weight from underweight on the perception that BJP-led National Democratic Alliance "could prevail" in the 2014 elections. Reasoning out the upgrade in the rating, the report depicted, “Optimism over political change, led by BJP’s prime ministerial candidate Mr. Modi, is dominating economic concerns.”
Hence, there is a wave of optimism over the political change in India after the victory of BJP in four key states. Moreover, the spectacular debut made by the Aam Aadmi Party (AAP) has contributed to Congress’ rout in Delhi. This shows that people want to overhaul the Indian political system.
Reiterating the view, Bandyopadhyay said, “The people of India want a clean group to manage the country.”
Referring to the key takeaways from the latest poll verdict, Pandey at ICICIdirect.com, said, “Barriers to entry have come down and finally the mandate to have good governance is a positive sign for the markets and the country.”
A broad comparison with Sensex performance at the end of general elections showed an interesting contrast: While in 2009 markets saw big upward moves of 18 per cent post the poll results, in 2004 markets posted a 19 per cent fall. One, the movement shift was significant on both occasions and second it did not go away shortly.
The rally post this assembly verdict has to be seen to be sustained.