May 22 (Reuters) - 0530 GMT: PREDICTING GAINS, STOCKS STRATEGISTS ASSUME BJP-LED COALITION WILL BE IN POWER Indian stocks are likely to build on this week’s rally to finish the year at record highs if Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP)-led alliance are returned to power, according to a Reuters poll of nearly 50 stock market strategists.
Exit polls have given the BJP-led alliance a comfortable majority although results will only be announced after votes are counted on Thursday.
All but one of the equity strategists said they had factored in either the BJP winning a majority or a victory of the BJP-led alliance in their forecasts.
Having gained 8% so far this year, the BSE Sensex index was forecast by the strategists to add another 2.6% by end-2019, touching an all time high of 40,000 from Tuesday’s close of 38,969.
The predicted rise is much smaller than the 15% percent stock market surge in the first six months after Modi came to power in 2014, suggesting some investors are less optimistic about the administration than they were then. Chart showing volatility (VIX) on the Nifty 50 over the last five days. There was a steep fall on Monday after the exit polls came out on Sunday night, but on Tuesday, the VIX was back up.
The BSE index closed 0.36% higher at 39,110 points. The broader Nifty index was up 0.25% at 11,738 points.
Both indices have been on a bull run since the exit polls came out on Sunday.
Goldman Sachs said it saw the equity valuations “as fair relative to our macro models, but a potential for valuation overshoot in the near-term if exit polls come true.”
“In the medium-term, we expect Nifty returns to be largely driven by mid-teen earnings growth (aided by banks) with a 12-month Nifty target of 12,500,” it said. “In the event of a decisive mandate which enables further progress on structural reforms, we expect a faster recovery in the corporate earnings over the medium term.” 0515 GMT: INVESTORS MAY NEED TO PROTECT AGAINST HUNG PARLIAMENT The benchmark BSE Sensex index has rallied 10.5% and the rupee 3% since border tensions with Pakistan broke out in late February and led to a surge in support for Modi. They have outperformed global peers - with around a quarter of those gains coming this week.
Having largely priced in a return of Modi’s government, the short-term upside potential for the Sensex and rupee could be limited in case of a BJP win. It would be prudent for investors to protect themselves against the risk of a hung parliament - and the resultant horse trading that would follow - even if it looks highly improbable at the moment.
Prime Minister Modi and his BJP-led alliance celebrated what could be a big win in the general election on Tuesday night - and party chief Amit Shah was in the limelight, newspapers reported.
He also occupied centre-stage at a get-together of the council of ministers at the BJP headquarters. Prime Minister Narendra Modi (right) shakes hands with Amit Shah at the party headquarters in New Delhi on Tuesday. REUTERS/Anushree Fadnavis
Shah’s central role at both meetings strengthened speculation that the leader’s stature could increase if the BJP returns to power with a big majority as many exit polls have predicted, the Telegraph newspaper said.
“Many in the BJP feel that Shah, considered the most influential after Modi, could get a powerful ministry in the new government,” it said.
Last week, Shah and Modi addressed a news conference together, where the prime minister refused to answer questions and deferred to the party chief.
0700 GMT: NEW GOVERNMENT HAS TO ADDRESS BANKS, JOBS, INFRASTRUCTURE
Modi is seen most likely to win the election, promising policy continuity, but economists say the task before the new government is immense as growth slows and financial markets clamour for decisive and meaningful reform.
“We are facing a liquidity and credit crisis - two separate issues which need to be handled differently,” said Rajeev Pawar, group head for balance sheet management and investments at Edelweiss Financial Services in Mumbai.
“Just cutting rates or a new government will not bring rates down,” he said in the Reuters Trading India chatroom.
Arguing for a sovereign bond issue by the government, he said: “Jobs need to be created. Jobs lead to income and consumption. But it’s easier said than done. To revive the economy you need money and the government is already deeply in debt.” Modi is presented with a garland in New Delhi. REUTERS/Anushree Fadnavis
“India’s absorptive capacity for the country’s growing supply of labour remains weak and so does its ability to build the necessary infrastructure,” said Alicia Garcia Herrero, chief economist at Natixis, in a research note.
“Both require Modi to deliver much bolder reforms in his second term that is certainly a strong leap from where it is today.”
The Mint newspaper said much needed to be done to convert the enthusiasm in financial markets to the real economy, including addressing faltering consumption.
“The crisis with India’s non-banking financial companies is still unfolding and could put the financial system through more pain,” it added. “Jobs remain worryingly scarce.”
The new government’s priority is likely to be on reforms on land, labour, privatisation and export promotion, Goldman Sachs said.
However, the Control Risks consultancy said: “Do not expect him (Modi) to carry out a wholesale privatisation of state-owned banks or loosen political control over lending decisions (which led to the debt crisis to begin with).
“At the same time, increased pressure over rural distress and unemployment will stoke Modi’s economic populist instincts, which will likely see an increased focus on rural spending and handouts aimed at supporting small and medium-sized enterprises.”
As election dust settles, jobs, trade, security high on government’s to-do list
0715 GMT: BOND MARKET MAY RALLY ANOTHER 10 BPS IF RESULTS REFLECT EXIT POLLS
Bekxy Kuriakose, head of fixed income at Principal Asset Management, said the benchmark 10-year bond could rally a further 10 basis points if the results to announced on Thursday gave Modi a win.
In the medium term, he said the government’s full year budget, to be announced in June, and the Reserve Bank’s decision on interest rates will be key.
“The debt market may not take it too kindly if there is further upward revision in the fiscal deficit target announced in the February interim budget,” Kuriakose said in the Reuters Trading India chatroom. “At this stage I would assign a 50% probability to a further rate cut in June by 25 bps, or even 10 bps to 15 bps, as the new governor has been talking about smaller quantum of rate cuts too.
“However, it is also likely that the RBI may wait for the full budget.”
Raju Gopalakrishnan, Karishma Singh, Savio Shetty and Divya Chowdhury