Barely a month back, many stock market gurus were predicting a ‘buyers only’ scenario on the day of the poll results if the National Democratic Alliance (NDA) managed to get anything in excess of 272 seats. The general view for the last few months was that the NDA would struggle to reach the halfway mark, and that made investors cautious.
So it was a bit surprising to see the Sensex and Nifty plunge from their record highs and close in the red despite the BJP outdoing its 2014 performance. The rupee too ended near its lowest point for the day.
What explains this anti-climax? Market reactions on the day of big events should be taken with a pinch of salt; after all it is prone to overreact on either sides. And yet there is something about today's market move that cannot be ignored.
A simplistic explanation would be the ‘buy-on-rumours-sell-on-news’ factor at play. Traders who had bought shares in anticipation of an NDA victory would have used the initial surge in prices to sell out at a profit.
But there is more to the underlying weakness than just plain profit booking. The lack of enthusiasm among investors reflects a belief that political stability alone cannot fix the micro and macro problems the market is grappling with right now.
It is not because investors doubt the government’s intent or competence, but because these problems will take time to fix.
Demand is weak, the problems in the NBFC sector is further hurting consumption through reduced credit flow, private sector is not investing and the government's strained finances is limiting its ability to spend.
In addition to these domestic hurdles, there is also the ongoing trade war between the US and China, and rising crude prices, both of which threaten to hurt global economic growth.
Foreign institutional investors were aggressive buyers from February to April this year, but the purchases were concentrated in a handful of frontline stocks. So while the Sensex and Nifty were making new highs, most mid and small cap stocks continued to languish. And with corporate earnings growth still anemic, the market as a whole is looking expensive.
And yet, these are all known factors and have been factored in the prices, just like the landslide victory for the NDA has been.
The good part is that market expectations from NDA 2.0, both in terms of new policies and fixing existing problems, are not high. That limits the downside for the market from current levels, unless the US-China trade war gets really ugly or if crude prices climb steeply.
Given that global equity markets in general are going through a rough patch, FII flows into Indian equities could be volatile.
But market experts expect domestic investors, especially high networth individuals, to resume investing now that the political uncertainty is behind. That could provide a floor to stock prices in the short term, and a counterbalance to volatile FII money.
A runaway rally looks less probable in the short term, given domestic and global headwinds buffeting the market. But, this is a good time to look for bargains as many good names in the mid and small cap space are available at reasonable valuations. Better than expected economic policy measures and a gradual recovery in the capex cycle could be the positive triggers to bet on.
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