India Today-CVoter's Mood of the Nation (MOTN) survey predicted 335 seats for the BJP-led National Democratic Alliance (NDA) in the forthcoming Lok Sabha elections, which would be better than NDA's 2019 show. Will hopes of Prime Minister Narendra Modi's third term in office drive a stock market rally in the run up to general elections?
While the share market is seeing high volatility of late, a recent study by ICICIdirect suggested that Nifty has a tendency to bottom out in February-March, followed by minimum 14 per cent rally towards general election outcome in each of seven instances over past three decades.
"The usual bull market corrections in Nifty are around 8 per cent (multiple cycle average) followed by new highs. As 4.5 per cent correction (from life high of 22,124) is behind us, model indicate strong support in 20,500-20,800 which we expect to hold," the brokerage said.
Data showed Nifty fell 4.8 per cent in 2019, only to rally 13.7 per cent ahead of general elections. In 2013, the index initially fell 7.5 per cent, only to surge 27.5 per cent later ahead of elections. In fact in 2009, Nifty jumped 77.5 per cent in the election rally after falling 19.3 per cent initially. The 50-pack index gained 14.5 per cent in 2004 pre-election rally, 32.3 per cent in 1999 pre-election rally and 39.9 per cent in election rally. It was up 41.3 per cent in the run up to 1990 elections.
"It is testament to the confidence of Indian Prime Minister Narendra Modi ahead of the pending general election in April-May that his government announced a budget on 1 February that is almost devoid of vote-buying populism. This is a pleasant surprise to GREED & fear," Jefferies said on Thursday.
To recall, the recent wins for BJP in three state elections held in November pushed markets higher. In its India Themes 2024, CLSA last month suggested that there is a prevailing sense amongst investors and India watchers that the government policies are on the right track to ensure sustainable growth for India. It found similar confidence echoed by policymakers.
"We therefore reason if PM Narendra Modi gets a third term, policymaking will not be very different from his previous terms: a continuation of investment-linked policies and limited ‘knee-jerk’ actions to directly boost consumption, waiting instead for gains from investments to eventually percolate down to consumption and the rural economy. Direct tax reforms and structural reforms of bureaucracy as well as the judiciary could be other areas a triumphant Modi may seek to address in a third term," CLSA said.
CLSA noted that the government had the required numbers in both houses of the parliament to push through many key reforms in its second term.
"Therefore, a large part of the third term may focus on getting the sustained benefits of these reforms. We see a continued focus on areas like defence manufacturing, electronics manufacturing, water solutions and hydro. We also expect further work on signing off more bilateral free trade agreements with other countries. At the same time, we also note market debate on the possibility of more structural reforms, looking at bureaucracy and the judiciary, as an area of government focus," it said.
To be sure, the government had the option of announcing some measures in the Budget aimed at its target constituents – the poor, youth, farmers, and women. However, by sticking firmly to macro prudence, the government is signalling that it is fairly confident of adequate public support, obviating the need to rely on any last minute populism, Nomura India said in a post Budget note.
"Opinion polls suggest the BJP-led coalition (NDA) should be able to secure a simple majority in the general elections and form a government for the third consecutive term, with recent fractures in the opposition alliance further supporting these polls," it noted.
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