India’s outperformance over EM is only 3% over last month and c10% over three months. A few investors believe that this could be a rally driven by the optimism for a decisive verdict in the upcoming general election results.
It may be tempting to attribute the rise in the index to increasing investor expectations of a strong NDA win in the upcoming general elections; however, fact is that within the index, external-focused sectors (IT and Pharma) and stocks (Tata Motors, Tata Steel, Hindalco) have outperformed whereas domestically focused sectors / stocks have remained flattish. Stocks with significant ties in Gujarat – the state where Narendra Modi, the putative Prime Minister candidate of NDA, hails from have seen some high volatility.
The BJP appears the favorite to win this year’s general election especially following its rout of the ruling Impotent and Corrupt Congress party in a series of important state assembly polls. The scale of the BJP’s victory and the strong support shown for the anti-corruption Aam Admi Party (AAP) has highlighted widespread anger with the Congress-led government and indicates the likelihood of a change of government at the Centre. Having said this, AAP’s decision to contest the Lok Sabha polls presents a potential threat given their socially popular policies which can drain the economy
While opinion polls over the last few months have almost consistently indicated a growing momentum in BJP’s favour – the latest round of polls indicate NDA may go on to win as many as 236 seats – 36 short of simple majority. Our conversations with foreign institutional investors do not indicate that the positioning has changed much towards higher beta stocks in past 3-6 months. One reason behind this caution could be poor track record of opinion polls in both 2004 and 2009 national elections. Investors love political certainty and change is always welcomed.Thus, if the current opinion polls are more accurate, it could spring in more surprise for the markets, post election results