Indian stock markets are touching new highs, following the Bharatiya Janata Party’s victory in the populous state of Uttar Pradesh. The size of the victory (the party won 312 of the state’s 403 seats) came as a surprise and emboldened investors to make optimistic bets on India’s future under its now hugely popular prime minister, Narendra Modi. On Tuesday, the first trading day after the BJP’s victory last Saturday, the National Stock Exchange’s benchmark equity index, the Nifty, touched a new all-time high of 9,122 before closing at 9,087 – the first time it has closed above the 9,000 mark in its trading history of just over 20 years. The Sensex is currently at levels of around 29,600, just 400 points shy of beating the record of 30,000 that it hit during trading on March 4, 2015.
Mount 9K: Third time lucky
The bullishness in Indian markets comes after nearly three years. In 2014, the Nifty had risen 14% (from January 1 to May 16) in anticipation of the BJP’s victory in the Lok Sabha elections that year. From there, however, it found it tough to close above the coveted 9,000 mark. It tried twice, once in 2015 and then in 2016, but fell short each time. Therefore, this attempt was special. Once again, before the Uttar Pradesh Assembly election results, the Nifty was close to hitting the mark, having risen 9% in 2017. Thus, in the event of a BJP loss in the state, another sell-off was expected, as seen in the preceding two years.
But this time was different. The optimism continued even after the Nifty closed above 9,000 on Tuesday. On Thursday, it closed even higher at 9,154, another all-time high – up 23% in the past year and a 27% rise since the BJP won the general elections in 2014.
India joins global rally
The rally in India’s stock markets is following a global trend. Last month, the US stock markets witnessed what was called a grand slam, with the S&P 500, Dow Jones, Nasdaq, and the Russell 2000 all hitting new all-time highs. The US Federal Reserve’s decision to hike interest rates ends the era of liquidity support and markets are greeting this with a cheer. Also, the MSCI Asia Pacific Index (which captures the performance of five developed markets countries and eight emerging markets countries in the region) is at its highest since mid-2015. And the Stoxx Europe 600 Index is trading at its highest level since December 2015. The BJP’s victory in Uttar Pradesh, thus, came at a good time for Indian stock markets.
Liquidity fuels optimism
For many years, the foreign institutional investor was the main buyer of India’s equities and, hence, a critical decider for the direction of the Nifty and the Sensex. However, over the past few years, the retail investor (an individual who buys securities either directly or through mutual funds for his or her own personal account) has emerged as a potent force. And since May 2014, net inflow into the equity mutual fund industry is estimated at around Rs 2 lakh crores, a record for the sector.
Indeed, the jump in inflows from the systematic investment plan route stands out in this regard. An article in Mint pegs this inflow at Rs 4,000 crores a month in 2016, up from Rs 1,800 crores to Rs 2,000 crores per month in 2015. While foreign institutional investors were lagging in these large inflows, the trend appears to have reversed at least in the short term. These investors have bought $2.3 billion in Indian debt and equity so far in March, shows National Securities Depository Limited data. Thus, the rally in the Indian stock markets is being fueled by a steady flow of money. How long this goes on is anybody’s guess.
Demonetisation, an obituary
Following the BJP’s victory in Uttar Pradesh, investors are betting that Prime Minister Narendra Modi will keep his mandate in 2019, when India next goes to polls. This is viewed as a positive for economic policy, long-term reform, and overall gross domestic product growth for India. Fears of the impact of demonetisation on growth have also subsided, at least for investors. With banks lifting all restrictions on cash withdrawals and gross domestic product growth staying put at 7% (at the risk of accepting the Central Statistics Office’s data), the impact of demonetisation is out of the investor’s memory.
However, India’s industrial growth is not back to the peak levels seen in the noughties, and bad loans continue to hobble public-sector banking. Investors believe that these prooblems will be resolved eventually. Besides, India’s famous consumption growth and the strength of the services sector provide reason for optimism.
What happens next?
Only time will tell if investors, betting on the Nifty’s continued rise in the future, are proven right. As legendary investor Benjamin Graham famously said:
“In the short run, the markets are a voting machine but in the long run, it is a weighing machine.”
Indeed, votes are given as a bet for the future, while the weighing machine gives an accurate picture of reality, shorn of any emotion.
Currently, from the Uttar Pradesh voters to investors buying into the Nifty’s rally, the vote is clearly positive. However, prolonged binges detached from reality don’t end well and a look at the weighing machine brings us back to reality. Thus, the longer-term direction of the Nifty will be decided by Modi’s ability to decisively address problems that hold back India’s economic growth potential. For the sake of the current optimism, we can only hope that Modi lives up to expectations.
Anupam Gupta is a chartered accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.