India Stocks, Bonds Set to Gain as Polls Show Landslide Modi Win

(Bloomberg) -- Indian stocks, bonds and the rupee are poised to climb after exit polls indicated a resounding victory for Prime Minister Narendra Modi’s party in general elections that concluded Saturday.

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Most pollsters predict the Bharatiya Janata Party-led alliance to clinch between 350 and 400 seats in total, substantially more than the 272 required for a majority in the 543-seat lower house of parliament. In 2019, they won 352. The votes will be counted on Tuesday.

The predictions are likely to calm investors rattled by recent stock market volatility, driven by concerns that the BJP might fall well short of Modi’s ambitious 400-seat target due to low voter turnouts and tight races in several states. A landslide win would enable the party to push through policies that are seen as crucial for boosting India’s economic growth, which is already among the world’s fastest.

“There was some skepticism, with volatility picking up as some people were getting jittery on the election outcome. Now it will settle — this is a resounding vote for continuity,” said Vinit Sambre, who oversees about $12 billion as head of equities at DSP Mutual Fund in Mumbai. “Markets could react positively on Monday.”

Offshore Indian rupee non-deliverable forwards climbed as much as 0.4% early on Monday.

While the final results might differ from the exit polls, the strength of the projected victory is expected to benefit risk assets. Indian equities reached a record in May, while the bond markets are near their highest levels in about a year.

“The suggested size of the majority would allow the government to continue unabated with its current policy program,” said Gary Dugan, chief investment officer at Dalma Capital Management Ltd. in Dubai. “We could imagine a 3-5% return from the market on Monday.”

Stocks to Watch

Should the results on June 4 align with the exit polls, analysts expect the NSE Nifty 50 Index to reach a new record. The main gauge slid nearly 2% last week as foreign investors treaded cautiously ahead of the election outcome.

Read more: India’s Equity Rally Hinges on Modi Bettering 303-Seat Tally

“Foreign investors will need to cover short positions quickly,” said Abhay Agarwal, founder and chief investment officer at Piper Serica Advisors. “Margin calls on short positions may lead to the market spiking beyond 23,000 on Monday — a new high — and close to 23,500 on June 4th” if the numbers for the ruling alliance are above 350, he said.

Shares of state-owned companies, infrastructure-linked firms and those of some corporates including the Adani Group and Mukesh Ambani’s conglomerate may be in focus Monday. About 90% of the 54 stocks that CLSA referred to as ‘Modi stocks’ in its May 29 note have beaten the Nifty index in the past six months.

These companies are perceived to benefit from the BJP’s pro-growth policies and their outperformance may extend in case of a strong election result, the note said. Engineering giant Larsen & Toubro Ltd., and power generators NTPC Ltd. and NHPC Ltd. are among CLSA’s preferred stocks.

Read more: INDIA REACT: Modi 3.0 a Done Deal, Victory Size to Decide Policy

Sentiment will also be buoyed by faster-than-expected economic growth data, published after market hours on Friday.

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India’s gross domestic product grew more than 8% in the fiscal year that ended in March, cementing the nation’s position as the world’s fastest-growing major economy.

S&P Global Ratings recently indicated a potential credit rating upgrade for India, boosting financial markets ahead of the country’s inclusion in JPMorgan Chase & Co.’s emerging market bond index later in June.

“For the bond market, many things have been positive of late,” said Saurabh Bhatia, head of macro strategy and fixed income at Sapient Finserv, adding that the election outcome may give further fillip. “A strong government leads to more fiscal discipline and macro stability. Bonds will rejoice.”

Strategy views

Farley Capital (Andrei Stetsenko, partner and portfolio manager)

  • If we see a renewed push to implement long-stymied but potentially economically transformative reforms to politically-sensitive areas such as agriculture, labor laws, and land acquisition, there would be potential for the “India premium” to other emerging markets to widen even further

  • If, however, that political capital ends up focused more on potentially divisive social issues, I’d expect the opposite

Quantum Advisors (Nilesh Shetty, portfolio manager)

  • The consensus view was that Modi would come back and exit polls reaffirm that view. Any opportunistic shorts will cover, which can lead to a near-term rally

  • Over the last three decades, election results have not mattered much as average GDP growth has hovered around 6.5% irrespective of the government in power

Trust Mutual Fund (Sandeep Bagla, chief executive officer)

  • Equity, currency and bond markets should greet the exit poll results with a renewed enthusiasm as the uncertainty regarding poll verdict is finally getting over

  • Given the likely buoyancy in the rupee, bonds should be well supported and there’s a distinct possibility that the 10-year benchmark bond yield could touch 6.90% in the near future

Societe Generale SA (Rajat Agarwal, Asia strategist)

  • The average outcome of the exit polls is not much of a surprise from the opinion polls ahead of the elections. This is pretty much the number that market and foreign investors were working with

  • Foreign investors have been more concerned about Indian valuations rather than the election outcome, so this result may not change their behavior

Emkay Global Financial Services (Madhavi Arora, lead economist)

  • Expect reform-driven targeted expenditure agenda to continue, while healthy macro balance sheet of all economic agents augurs well for a higher trend growth path

  • Once the election event risk is over, all eyes would be on the budget in July, which could continue with the consolidation process while improving budget internals

--With assistance from Ronojoy Mazumdar, Abhishek Vishnoi and Subhadip Sircar.

(Updates with early Monday move in rupee NDFs in the fifth paragraph. A previous version corrected the designation of Trust Mutual Fund’s CEO.)

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