Will Lok Sabha Exit Polls on 13th May set Direction for Stock Market ?

May 8, 2014 · Author: · Category: market 

Indian Stock markets are more favourably disposed towards a Modi-led BJP/NDA Government and that his victory is now being assigned increasingly higher probability. Opinion poll forecasts for NDA have moved up from 165-190 in Jul-13 to 240- 265 in Apr-14, vs. 272+ required for a majority. Markets may react quite differently to actual outcome scenarios, in the short-term. Our discussions with investors suggest that a number closer to the 272 mark or more would be taken very positively, possibly euphorically near-term. A number below 220-230 for NDA may be taken negatively short-term. An in-between outcome would create uncertainty and markets may not move as sharply as the other two scenarios immediately, till clarity emerges on the form and leadership of the new Govt.

Lok Sabha Exit Poll Results 2014
Some investors expect a sharp move on 13 May, as exit polls come out on the evening of 12 May, ahead of actual results on 16 May. We would like to highlight that exit polls were also inaccurate in predicting the outcome of the 2004/2009 elections, similar to opinion polls. As such, any major directional move is likely to happen only on 16 May and after, in our view, though exit polls will play some role in directing sentiment till the 16th.

Nifty at 6900 would be a possibility if markets start believing in a positive election outcome, based on 15x PE (c5yr avg) and 15% earnings growth expectation in FY15. Current valuations for Nifty at c.14x 1yr fwd PE are near 3y / 15y avgs, implying that a positive election outcome may not yet be priced in. This is also supported by India’s valuation premium over Emerging Markets.

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