Modi and Mr Market: My Verdict on Where the Markets Are Headed Now

May 20, 2019

Ankit Shah, Research analyst

On Saturday, a day before the last phase of polling in the 2019 Lok Sabha elections, something very bizarre happened in my family.

One of our relatives suffered a minor hairline fracture after tripping over a raised platform in the entrance of their own apartment.

My family was quick to call and enquire about the severity of the injury. Fortunately, it was not too bad. Nevertheless, my mom insisted we visit them.

However, the visit was postponed to a date after 23 May, after one wise member in my family foresaw that this wouldn't be a good time to visit.

The reason being that the two families are at loggerheads when it comes to politics - one being a hardcore BJP supporter, and the other, a long-time Congress supporter. And given the high-decibel hype and tension surrounding the elections, it wouldn't have been the most pleasant and peaceful of social visits. 😊

Exit Polls Point to Another Modi Term

The phase-7 of the Lok Sabha elections concluded yesterday. In the evening, I sat with my dad to watch the exit polls on television.

Most exit polls predicted a comfortable victory for the BJP-led NDA, with another term for Prime Minister Narendra Modi.

If the exit polls are pointing in the right direction, then Modi we be the first PM in 48 years to win a second mandate with a clear majority.

But before you take the exit poll results for granted, here what you must know...

An exit poll is a survey of voters conducted soon after they cast their vote in the polling booth. Unlike the opinion polls, the exit polls ask voters which party they voted.

Different organisations carry out exit polls in India using different methodologies. Sometimes they are right, sometimes they are off the mark.

Even outside of India, the pollsters have failed many a times to read the public mood. Take Brexit for instance, or Donald Trump's victory in November 2016.

In fact, even earlier this week, pollsters got it all wrong in the Australian elections.

In short, exit polls are not always a reliable indicator and should be taken with a pinch of salt.

How Will the Election Results Influence the Stock Markets?

Now, coming to my beat - the Indian stock markets.

Many of you may have this question: How will election outcome impact the stock markets in the coming days and weeks?

Here's my view...

The markets had already priced in a second term for Modi.

The market correction that we have witnessed over the last one month was mainly triggered by the escalation of the US-China trade war. The other factors that were weighing on the markets included signs of slowdown in the domestic economy, the outcomes of the ongoing earnings season, as well as nervousness about the outcome of the elections.

Mr Market hates uncertainty and unstable governments. With most of the exit polls predicting a clear majority for the NDA, anxiety has given way to celebration.

A Modi victory is likely to bring back investors who had been waiting on the sidelines. The inflow of liquidity into the markets may cause stock prices to rise in the near term.

As expected, the markets have given a big thumbs-up to the exit polls. The Sensex opened 780 points higher (+2.1%). In the near term, the markets may witness a relief rally after a month of bearishness.

But as I said earlier, the markets had already priced in a Modi victory. So, the upside from the election outcome alone will not be huge.

On the other hand, if the election results throw a surprise next week and the exit polls are proved wrong, then the markets will correct sharply.

Once the elections are out of the way and the excitement of the second Modi term fades, the markets will go back to focusing on the results season and key macro factors that are likely to impact corporate sector growth and earnings.

And this is where things are not quite hunky-dory. The US-China trade war has been escalating. There are growing fears of a global slowdown. Oil prices have firmed up again. Government and RBI data points suggest that the economy is slowing over the past few quarters. There's an ongoing crisis in India's financial sector following the collapse of IL&FS. And there's more...

So, if you're a serious long-term investor, you must not read too much into a likely Modi victory, but focus more on the big factors that will shape markets in the coming months and years.

In my premium newsletter, besides cherry-picking the best investing ideas, I have been regularly sharing insights about the top global and domestic factors affecting the stock markets and guiding my readers to invest smartly.

Chart of the Day

For most of my years as an analyst, I focused predominantly on identifying companies with sound long-term fundamentals, durable moats, and reasonable valuations, among other factors. Also called the bottom-up style of stock-picking.

I still believe that's how you should go about picking stocks for your portfolio. And that's how I cherry-pick stocks for you from the various premium services to which I have access.

But over time, I have come to appreciate the influence of macro trends on the stock markets. And I believe investors must be cognizant of these trends so that sudden external shocks don't catch them unawares.

For instance, the bullishness that we witnessed in the markets from March until mid-April was driven by renewed foreign investor flows into Indian equities.

One of the key reasons this money poured into India, including other emerging markets, was the shift in monetary policy stance by the US Federal Reserve.

The US central bank, until some months ago, was on track to hike interest rates and shrink the Fed balance sheet. But seeing signs of slowdown in the economy and the nervousness in the stock markets, it showed its willingness to turn dovish.

So, it's unlikely we'll see any interest rate hikes by the US Federal Reserve in 2019.

In fact, my reading suggests that the Fed may resume its easy money policies if the global economic slowdown persists and the markets gets jittery.

One of the key triggers for the ongoing market correction is the escalation in the US-China trade war amid increasing fears of a global slowdown.

The chart below shows how foreign money moved in and out of India over the last three months owing to the evolving global events...

Foreign Investors Turn Sellers in May 2019

Warm regards,

Ankit Shah
Ankit Shah
Editor and Research Analyst, Equitymaster Insider

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