The gap-up is expected to result in a rush for short covering by foreign institutional investors and proprietary traders who had feared the NDA might not be able to secure more than 300-310 Lok Sabha seats, say market experts Mint spoke with.
A strong electoral mandate for the ruling alliance would ensure policy and fiscal continuity that have helped India retaining its crown as the world’s fastest-growing major economy.
Most exit polls announced on Saturday, following the final leg of the seven-phase national election, see the BJP-led NDA winning about 350 parliamentary seats, with at least three pollsters predicting a range of 370-400 seats.
“I believe there will be a surprise on the positive side, with the NDA likely to win 400 seats,” said A. Balasubramanian, managing director and chief executive, Aditya Birla Sun Life MF.
“On Monday, it’s likely to be a 2.5-3% gap-up, followed by a short squeeze. There were a lot of shorts in the system building up over the past three-four weeks, which the bears will perforce have to cover.”
A 3% higher opening could fuel the Nifty to above 23,200 points, up from Friday’s closing level of 22,530.70. This could result in bears “scurrying for cover” on Monday and possibly Tuesday as well, said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
“There is the GDP which is north of 8% (in FY24), the RBI dividend of ₹2.11 trillion, and now the exit poll predicting a stronger showing by NDA than in 2019, which will fuel a 2.5-3% gap-up followed by short covering,” Holland said. “It could well take the market to 24,000 levels if the actual results surprise on the upside.”
The Election Commission of India will declare the results of the 2024 Lok Sabha election on 4 June.
Bullish HNIs, cautious FIIs
Foreign institutional investors were cumulatively net short on 318,367 index futures (Nifty and Bank Nifty) contracts on Friday. FIIs were also net short on index call options (Nifty and Bank Nifty) by 557,147 contracts.
These were hedges against their bullish single stock futures (SSFs) bets at 493,868 contracts and index put shorts of 200,854 contracts.
Proprietary traders, while being net long on index and stock futures contracts, were net short on index calls and long on index puts, which they will need to cover, according to market experts.
Also read | Retail investors bullish ahead of exit poll, FIIs cautious
Retail and wealthy, or high net-worth investors, on the other hand, entered the event in super-bullish mode, with cumulative net index longs of 313,903 contracts, over 2 million net long in single stock futures contracts, net long in index calls by 796,222 contracts, and net short index puts by 150,965 contracts.
Abhilash Pagaria, head of Nuvama Alternative and Quantitative Research, estimates the value of FIIs’ index shorts on Friday at a historic $2.8 billion, which is a hedge for their long SSFs at an estimated $4.7 billion.
The retail/HNI value of index longs stood at roughly $2.8 billion, while that of SSFs was at a historic $19.3 billion.
Gautam Duggad, head of institutional equities research at Motilal Oswal Financial Services, said none of the 12 exit polls his team analysed predicts a defeat or even a slim majority for Prime Minister Narendra Modi-led BJP or the NDA.
The lowest number of seats predicted for the NDA is 316, by Dainik Bhaskar, with a range of 281-351. The highest number of about 400 seats is forecast by Chanakya-News 24.
The BJP alone is expected to win about 325 Lok Sabha seats, higher than the 303 it won in the 2019 national election.
A first since Nehru
If the actual election results are in line with the exit polls, it will be the first time since the 1960s that an incumbent prime minister is returning to power for a third consecutive term with a comfortable majority.
The last time this happened was in the 1960s, when Jawaharlal Nehru, India’s first prime minister, won the Lok Sabha election in 1962 following successive wins in the 1952 and 1957 general elections.
Also read | There’s a reason why the Indian stock market seems to love the BJP
“With this clear verdict, markets will heave a sigh of relief, in our view, and go back to fundamentals/business-as-usual mode,” said Duggad of Motilal Oswal Financial Services, adding that recent market anxiety had resulted in a sharp rise in volatility in April and May.
India Vix, the fear gauge, rose 88% in May to 24.60 chiefly over uncertainty in the NDA’s margin of victory. The Vix shares an inverse correlation with the market: rising when the market falls, and vice-versa.
A Goldilocks moment
Fundamentally, India is witnessing a mini-Goldilocks moment with excellent macro-economic conditions, solid corporate earnings, the government’s focus on manufacturing, capital expenditure and infrastructure creation, and valuations at 20 times one-year forward earnings, said Duggad.
He was referring to the GDP growth of 8.2% in 2023-24, inflation within the Reserve Bank’s tolerance range at 5%, current account and fiscal deficits within the tolerance band, and solid corporate earnings that resulted in the Nifty ending 2023-24 with 25% earnings growth.
Also read | Roadmap for financial sector reforms to be unveiled post polls
At its current level of 22,530.7 points, the Nifty trades at 20 times one-year forward earnings, while the Nifty Midcap 100 (index level 51,705.7) and the Nifty Smallcap 250 index (15,626.65) are trading at 28 times and 22 times, respectively.
Stocks that could lead Monday’s rally include public sector undertakings, engineering and power companies, and banks, according to Gaurav Dua, senior vice president and head of capital market strategy at Sharekhan by BNP Paribas.
Mid-caps and small-caps are likely to continue outperforming the large-caps despite the higher valuations, added Balasubramanian of Aditya Birla Sun Life MF.
Meanwhile, foreign portfolio investors (FPIs) continue to be sellers in Indian shares. Domestic institutional investors (DIIs) have net invested ₹99,919 crore so far this fiscal year, while FIIs have net sold shares worth ₹34,258 crore.
