The stock markets hate even the possibility of a hung Parliament.
No sooner did the exit polls, after the second phase of the general elections, hint that the incumbent National Democratic Alliance government might not get enough seats to return to power than the stock market reacted violently. It crashed by a whopping 213 points on Tuesday to fall to 5712 points from 5926.
There was bloodbath on Dalal Street as the bulls, who have been making merry for the past few months, ran for cover. Even investors, whose confidence in the NDA government is high as they think investments will rise sharply if it is voted back to office, scampered for safety. Stocks across-the-board plummeted.
But analysts feel that India's economic reform process is unstoppable and will go on regardless of which political group forms the new government. Although, some believe that the ouster of the NDA government may slow down the reform process.
Broadly, most market players feel that exit polls are inaccurate and the political scenario is too fluid. The markets will remain uncertain and volatile over the short-term even as the NDA and the Congress battle it out. But over the long term, economic growth, reform process and corporate performance will help the markets push through -- backed by foreign funds.
The reform process will slow down but only marginally and will not be hit in a major way.
Reacting to Tuesday's market crash, Manoj Kakaiya, chief dealer, ULJK Securities, BSE institutional brokerage firm, said: "Over the near-term sentiment will be impacted. But over the longer-term, the economic growth is solid, corporate results strong and anticipated monsoons should be stable. The fluid political scenario will improve, so we see little cause for concern. The reform process will not be affected."
Advait Date, analyst, BHH Securities, BSE brokerage, says: "The possibility of a hung Parliament will take investors by surprise and fear of the overall slow down in executing critical reforms will hit sentiment. If the seat position is too fragmented, the next government may be more concerned with survival rather than taking critical decisions."
"However, the economic growth and fundamentals appear strong, as do corporate functioning, so sentiment will recover over the medium term. The reforms in the areas of tax streamlining, privatisation and infrastructure sector are not likely to slow down," he says.
Exit polls have been known to be way off mark in the past, yet the market players seemed to have taken the current exit polls on face value and sent the markets crashing.
Anish Marfatia, assistant vice president, Asit C Mehta Investments, says: "It was a black Tuesday. No one expected such a fall but the exit polls played the spoilsport and what we have is a depressed sentiment at least for the near term. The exit polls took everyone by surprise. Prior to the polls, the ruling alliance was seen cruising to victory on the back of strong economic growth. Now that may not seem to be happening immediately."
But the fundamentals of the Indian economy are strong and unchanged, and fund managers and market analysts feel that this is a good sign. With development and economic progress being the major election planks this time around, there is a broad agreement amongst and within political parties that the process of liberalisation should go on.
Vijay Tilakraj, chief dealer, KJMC Capital Market, BSE & NSE brokerage, feels that "this has been an over-reaction from the markets. One must remember that the states of Uttar Pradesh, Rajasthan, sections of Madhya Pradesh, Bihar and West Bengal have to still go to polls. It is thus too early to say something too soon. Post-elections, the markets will witness both uncertainty and volatility and there will be some glitches. I do not feel that there will be a hung Parliament, but the markets will see uncertain trends during the horse-trading process. The overall reform process will however not slow down."
Atul Hatwar, arbitrager, Crosseas Capital Services, leading NSE brokerage firm, too agrees: "This is a knee-jerk reaction. Exit polls in India are not necessarily accurate. The Indian political system is ever-changing and cannot be determined by just exit polls. Fresh alliances will be made and while sentiment over the short-term will be hit, the reform process will not be affected in a major way."
But fund managers say that the markets will rise after the elections and will be driven also by company results.
According to a DSP-Merrill Lynch fund managers' survey, the stock markets are likely to post double-digit returns and the Sensex may rule above the 6,700-mark in the next 12 months.
"While the stock story remains largely unchanged with fund managers expecting double-digit returns over one year, the degree of bullishness has moderated," the survey says. It studied fund managers managing over Rs 20,000 crore (Rs 200 billion) worth of assets.
"Over a 12-month horizon, 50 per cent of fund managers believe that the Sensex would be above 6700 points. Although bullish, this view is below the 7000-7600 range that we had last quarter," the survey says.
"With the markets trading in a broad range, the fund manager expectations of the index over a one-month horizon were dispersed in a wide range of 5400-6100," the survey adds.
Fund managers are quite bullish on the India story, but foreign institutional investors would most likely adopt a wait-and-watch policy and pause for the final results to come in before they take any decision.
Market players say that elections are a good time for investors to buy stocks.
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