Future is past continuous

The "Mayor of TV" John Landgraf once said, "Who owns the future? This is the question at the heart of every stock market." Markets love continuity – of stable political power and policies. Hence, it was much on the expected lines when the announcement of the Lok Sabha 2019 election results witnessed such tremendous euphoria among the market participants.

Second term for BJP

As the Bharatiya Janata Party (BJP)-led National Democratic Party (NDA) ensured a thumping majority in the Lok Sabha election 2019, domestic benchmark indices touched record highs.

As early trends on May 23 gave a clear mandate to the Narendra Modi-led NDA at the Centre for a second term, S&P BSE Sensex touched an intra-day new high of 40124.96, while NSE Nifty50 touched a record high of 12041.15 intra-day. Heavy buying was noticed on May 20 when markets opened a day after the exit polls were announced. The BJP and its allies, as predicted by the exit polls, comfortably passed the 300-mark, which resulted in a fresh euphoria in the market.

The markets were expecting strong government and continuity in policies, feels analysts.

According to Devang Mehta, head – equity advisory, Centrum Wealth Management, one of the major events, which had been an overhang, is finally out of the way, and it played out in the direction market participants wanted.

"That was a big moving part which has now got stable, there is policy stability and a government, which is strong and reform-centric, will keep the market participants interested in the longer term, over the next three to five years," Mehta says.

Another industry expert, on the condition of anonymity, says the markets were relieved to know there will be no diversion in the economic policies in any contradictory manner, since the earlier government is back in power.

Shiv Diwan, co-head, institutional equities, Edelweiss Securities says the markets were volatile and rallied a bit on anticipation of the exit polls, and the final outcome, which was followed by euphoria and excitement after BJP came back with such a huge majority. When exit polls came, there was one big rally on May 20 that accounted for "a large part of the game". This was followed by another rally that was seen immediately after the election results were announced, and made up for election traits, he adds.

What it means for the markets?

Mehta says the sentiments got positive after the election outcome. "Though the market has run a little ahead of time in the short-to-medium term, it will look for continuity in reforms," he adds.

According to him, on the liquidity side, foreign and domestic investors who were sitting on the sidelines will now have a "lot more degree of trust" that this is a good market where they can invest.

"India can be a market in a way which has the best demographics to invest," he says.

Vinod Nair, head of research, Geojit Financial Services, feels in the short term, markets are going to be positive.

"Before the election outcome, the major concern in the markets was whether there will be an absolute majority. But it was a very strong mandate, better than what the market was hoping for. In the short term, we are looking very positive, and this trend can continue till the Budget announcements. Markets have very high expectation from the final Budget 2019 as it will define what is to be expected in the next 3-5 years," Nair says.

IIFL Securities's head of research Abhimanyu Sofat and Edelweis Securities's Diwan concur.

"Overall, things are fine. There is a change in people's expectations on how much the government can do on reforms. Concerns related to fiscal deficit, liquidity, recapitalisation of banks can be addressed to some extent with some money transfer happening from Reserve Bank of India (RBI). There is a deficiency of liquidity in the system. If that gets addressed, markets are expected to do well in the foreseeable future," Sofat says, adding that the foreign institutional investors (FIIs) are positive, and things are likely to be decent going forward. Sofat feels Nifty should be around 13500-level by June 2020.

According to Diwan, the global macros are not in the "pink of health". Concerns are over US-China trade war, crude prices, quarter earnings, which resulted in a tight liquidity condition in the markets. Still, a downside is not seen in the near term, he says.

"There is political stability, easing of interest rates, and the worst of the results, to my mind, is also over. So, not a runaway rally, but not a downside either," Diwan adds.

However, not all industry experts agree.

Siddharth Sedani, vice-president – equity advisory, Anand Rathi Shares and Stock Brokers, expects the volatility in the short term to continue for three reasons – monsoon, quarterly earnings and global macros.

"Though to an extent, things have been priced in, but we never know. June will thus be volatile, even if there is a probability of Nifty crossing the 12000 level," he says.

Rahul Shah, VP – equity advisory group, Motilal Oswal says while volatility is going to continue in the market, he doesn't expect it to be similar to what was seen earlier.

"I don't feel it (volatility) is going to pull out. We are in sync with the global markets, but the 'crazy volatility' will not be there," he says. According to him, on the back of positive FII inflows, the markets will be in a range of 12000-12400 in the near-term.

Mehta says the markets will react to every event or every data point that will come out.

"We will either see cheer or a bit of disappointment," he explains.

According to him, the macros which were not in favour, on the fundamental side, will tend to improve in the next two-three quarters.

What will add to this optimism?

According to analysts, the possibility of a good monsoon, interest rate cut and a fiscal stimulus to spending and consumption in the final Budget 2019 can contribute to the positivity.

Sedani feels that the June quarter earnings will be a "status quo" of the last quarter. Soon after, things are expected to fall in place in terms of how the government takes up the 100-day project, or how the infra push of the last five years bears fruits.

"From medium- and long-term perspectives, we are very well placed. From a long-term perspective, it is a great proposition to invest. The investment environment has improved for sure," he says.

Mehta of Centrum points to a slowdown in GDP and indicators showing a consumption slowdown.

"Hope of a good monsoon, along with a probable interest rate cut will keep market participants excited," he adds.

According to Diwan of Edelweiss, monsoon will be a sentiment booster in the medium term as it will give impetus to rural spending. Markets will look at the government policies and for fiscal and monetary stimulus to improve spending and consumption. Nifty, he says, is likely to trade around 11800-12200 in the near term.

"Medium-term we are little more optimistic, but in the long term, we are positive that consumption will come back," Diwan says, adding that the market will be watchful of how RBI fixes the mess in the financial sector, apart from an interest rate cut.

Will the July Budget impact the markets?

While analysts do not feel any major change will be announced in the July Budget over the interim Budget announced on February 1, they feel it will be important from the point of what to expect in the next 4-5 years.

Rahul Shah of Motilal Oswal feels the upcoming Budget is "vital" as investors would like to see the action plans adopted by the government. If the announcements are good, it will lead to faster recovery, he says.

Mehta says with all the reforms that were undertaken earlier now settling down, the July Budget would be more a continuation of reforms on how to boost consumption or capital expenditure.

Anand Rathi's Sedani, too, agrees. He is of the view that going a populist way in the July Budget will not make any sense.

"The fiscal situation is not great due to crude prices and global trade prospects, and it is not giving room to the government to do something extraordinary. The main Budget would be more or less in the same line of the interim Budget," he says.

Nair of Geojit says job creation will be "a big agenda" for the government and to support it, spending must be increased.

Though analysts agree that higher spending will result in missing the fiscal deficit target for the current year, all feel it is the "need of the hour".

"The government will try to extend the fiscal deficit target for this fiscal as it is the need of the hour. RBI will look to reduce the interest rate and increase liquidity, which will support the government to borrow more from the markets," Nair says. Post the election results, Geojit has revised Nifty's one-year target to 12700.

Mehta of Centrum says markets will be prepared if higher spending leads to missing the fiscal deficit target by a whisker, but not by a large margin, as the country would need a lot of spending and stimulus.

"There has to be a stimulus from the government for both capex and consumption sides," he adds.