May 17--When the stock markets opened for trade on Friday, 16 May, early leads were suggesting that the outcome of the general election was going to be much better than what the street had expected.
As a result, the market opened with a gap up and, at one point, the S&P BSE Sensex was up over 1,400 points compared with its previous close and crossed the 25,000 mark, though it gave up some of the gains later in the day on profit booking. BSE Sensex ended the day's trade with a gain of 0.90%, with cyclical sector indices such as Realty and Bankex gaining 5.97% and 4.39%, respectively.
Before the markets closed, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) had either won or was leading in 340 out of the 543 seats. However, what surprised the markets positively was that BJP on its own accord was either leading or had won 283 seats, which is sufficient to form government at the Centre. "The outcome is much better than what the market was expecting," said S. Naren, chief investment officer, ICICI Prudential Asset Management Co. Ltd, adding that there is scope for Indian equity markets to get re-rated in the short-term. Mid-caps and infrastructure sector would do well from here on, said Naren.
This view is shared by others. "Markets can go up 20% from the present level," said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd, who is bullish on select companies in the capital goods and infrastructure sectors.
Clearly, the mandate in favour of BJP and NDA is much stronger than what anyone on the street had expected. It is for the first time since 1984 that a single party has managed to win so many seats in the lower house of the Indian Parliament.
A clear majority in the Lok Sabha will help the new government push legislations and reforms. Therefore, there will be high expectations from the government, which is being reflected in the stock prices. BSE Sensex has gained about 8% in the last one week.
So, where will the markets go from here? "Over the past decade, a fragmented coalition with differing economic ideologies had been the key reason for the economic malaise. The historic verdict, hence, justifies a re-rating of the Indian equity markets," said a note from Deutsche Bank.
Plan of action
Since the market had already run up a lot in anticipation of the election outcome, there is a chance that it takes a breather before making the next move. "Markets can consolidate," said Andrew Holland, chief executive officer, Ambit Investment Advisory Pvt. Ltd, adding that markets will now look forward to the formation of the government and will be keen to see who takes over as the finance minister.
Now that the much-watched general elections are over, and the outcome is clear, the next event that the market will look forward to is the Union budget.
In terms of risks, said Bandyopadhyay, poor monsoon and rise in interest rates in the US can still upset the market.
A decisive majority in the favour of BJP-led NDA is likely to keep the street upbeat in the near term and the market will now focus on the formation of the new government, and how it deals with some of the marco economic challenges such as containing consumer price inflation and kick-starting the investment cycle, which will help revive growth.
All eyes are now on the budget.