Forbes India 15th Anniversary Special

Markets on a sugar rush as exit polls thrust Sensex, Nifty to record highs

The markets are excited as exit polls forecast a third term for the Bharatiya Janata Party-led NDA government. But how accurate are the exit polls, and what are the odds for market investors now?

Published: Jun 3, 2024 05:45:12 PM IST
Updated: Jun 3, 2024 06:17:43 PM IST

Markets on a sugar rush as exit polls thrust Sensex, Nifty to record highsMost exit polls predict that the BJP alone will comfortably cross the half-way mark in the lower house of the parliament (272 seats) and even improve on its 2019 tally of 303 seats, with polls pointing to potentially more than 330 seats for the party alone Image: Debajyoti Chakraborty/NurPhoto via Getty Images
 
Even as actual count of votes of the Lok Sabha elections is scheduled on Tuesday, markets investors are already on somersaults based on exit polls, which point to a third term of Prime Minister Narendra Modi-led NDA (National Democratic Alliance). Hectic buying by investors, as soon as markets opened for trading on Monday, drove both the benchmark indices to all-time highs while the volatility index India VIX cooled off drastically.
 
The Sensex hit a new high at 76738.89, gaining 2777.58 points or 3.7 percent. The 50-share index Nifty too made a record high, adding 808 points, or 3.5 percent, to 23,338.70.
 

Following the last phase of elections, all exit polls estimate that the Bharatiya Janata Party (BJP)-led NDA alliance looks set to secure a strong majority, with more seats than it won in 2019. If the results are in line with the exit polls, investors feel that it will allow the government to bring back some economic reforms like land laws.  Official results of the Lok Sabha elections will be announced on June 4.  Voting was conducted in seven phases from April 19 to June 1.
 
“The victory of PM Modi/BJP augurs well for the economy and capital markets as it provides stability and continuity in policy- making with a single-party majority government, which will be expected to continue pushing its economic agenda,” says Gautam Duggad, head of research, institutional equities at Motilal Oswal Financial Services. He feels after the clear verdict, stock markets will be relieved and get back to fundamentals and business-as-usual mode.
 
Duggad explains that fundamentally, India is witnessing its own mini-Goldilocks moment with factors such as strong macros (GDP growth of 8.2 percent in FY24 on the back of 7 percent growth in FY23, inflation at 5 percent, both current account and fiscal deficits well within tolerance band, stable currency, etc.), solid corporate earnings, focus on manufacturing, capex and infrastructure creation, and valuations at 20 times one-year forward earnings.
 
“This verdict and consequent political stability, and continuity in policy-making will act like an icing on the cake and keep India as the cynosure of all eyes,” Duggad adds.
 
However, markets were nervous and anxious during the voting phase on political uncertainty with India VIX heating up considerably. On Monday, India VIX cooled off nearly 15 percent, a clear sign that investors are not expecting any major markets corrections.
 
The India VIX had seen a sharp rise of about 116 percent in the first two weeks of May, indicating investors were getting increasingly nervous about a sharp correction in markets in at least the next 30 days. The India VIX, often referred to as a fear gauge or fear index, has an inverse correlation with rising markets. India VIX had risen over 90 percent in last one month.

 “If the Lok Sabha results on June 4 matches exit poll numbers, our country is likely to enter a ‘golden phase’ of political stability and policy continuity,” says Neeraj Chadawar, head of research, Axis Securities.
 
Chadawar believes that policy continuity is a crucial element for the continuation of the current macro cycle. The focus of Modi in the third term is expected to continue on developing the country’s public infrastructure such as roads, water, metro, railways, defence, digital infrastructure, and green technologies.
 
“Its overall focus would also be on creating more jobs and achieving investment-driven growth. Furthermore, the private capex, which has been sluggish for the last several years, is expected to receive a much-needed push in the upcoming years,” Chadawar says.
 
However, market movements in the past elections suggest that the market tends to do well going into the election but may fall relatively lower after results.  According to Saion Mukherjee, equity research head, Nomura, markets may react positively in the short term while foreign institutional investors (FIIs) flows may improve post elections.
 
“Unlike in the past elections, outperformance of Indian equity markets to other benchmark indices such as the S&P and MSCI EM is lower this time. We think higher valuation relative to the past and expectation of an NDA win meant that the risk-reward is not very favourable going into the election. Some investors thus do not want to take the event risk. We think foreign investors, in particular, are on the sidelines awaiting clarity on the election outcome,” Mukherjee says.
 
FIIs have net sold $4 billion of Indian equities in FY25 so far. FII holding in Indian stocks, as a result, have declined to 15.6 percent versus 19.5 percent pre-Covid, as per an analysis by Nomura. While domestic money has remained sticky with inflows under systematic investment plan (SIPs) and inflows into pension and insurance schemes. Flows under MF SIPs are now 140 percent higher than pre-Covid levels.

Also read: Markets stare at $14.5 billion outflow risk
 

What exit polls mean?

Most exit polls predict that the BJP alone will comfortably cross the half-way mark in the lower house of the parliament (272 seats) and even improve on its 2019 tally of 303 seats, with polls pointing to potentially more than 330 seats for the party alone. The exit polls give a range of 359-401 seats for the NDA.
 
According to average of all exit polls, NDA is forecast to win 370 seats (NDA had won 353 seats in 2019) Today’s Chanakya, the only agency that predicted the 2014 seats correctly, has estimated 400 seats for the NDA. Meanwhile, the highly respected and eagerly awaited Axis MY India Exit Poll (the agency that accurately predicted 2019 and also has a track record of correctly predicting 64 out of 69 polls to date) has placed the NDA in the higher range with 400 seats (361-401).
 
Within the NDA, the BJP alone is expected to win 325 seats. 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 will be returning to power for a third consecutive term with a comfortable majority. Earlier, it was only Jawaharlal Nehru (India’s first Prime Minister) who won the Lok Sabha Elections in 1962, 1952 and 1957. And if the BJP wins 325 seats as predicted by the exit polls, it would have surpassed its previous tally for the second time in a row after winning 282/303 seats in 2014/2019, highlighting the pro-incumbency trend.
 
The opposition I.N.D.I.A. alliance is projected to win 140 seats. Within the opposition grouping, Congress is likely to improve its tally from 52 in 2019 to win 65 seats. Congress’ tally had slumped to 44 in 2014 (its lowest ever) from 206 in 2009 and then marginally improved to 52 in 2019. Congress is also expected to increase its vote share to 21 percent in 2024 from 19 percent in 2019, but it will still be close to half of the BJP’s expected vote share.
 

What if exit polls are not accurate?

Historically, out of the four exit polls conducted for general elections over 2000-2019, three have correctly predicted the direction of voting trends. Exit polls have also been generally more accurate than the pre-election opinion polls.  For instance, in 2019, the major agencies' exit polls projected an NDA majority, though its margin of victory was underestimated. Pre-election opinion polls in 2019, however, were more off the mark in terms of the victory margin. These situations were a repeat of 2014.
 
“In 2009 — where exit polls predicted the outcome direction correctly — the number of seats won by the UPA alliance, which formed the government, were more accurate in opinion polls compared with exit polls,” says Shreya Sodhani, economist, Barclays. The exception was 2004.
 
In 2004, most exit polls as well as opinion polls pointed to the NDA winning a majority to form a government. However, the final results showed the BJP underperforming these expectations, and Congress outperforming, ultimately forming the next government with its coalition partners (the United Progressive Alliance), says Sodhani.
 
Rajeev Karandikar, a leading mathematician and psephologist in India, says that India’s first-past-the-post system makes it difficult to forecast the number of seats a party will win. He notes that polling agencies generally have been accurate on the vote share, which they then extrapolate to the number of seats a party will likely win using conservative estimates. Hence, the polls generally get the direction right, but not the margin of victory.
 
However, as of now, exit polls have enthused markets investors expecting policy continuity.
 
“A tally of more than 331(+/-15) seats for the BJP (2019: 303), as per Axis-India Today, regarded as one of the leading poll agencies, could be a big boost for markets,” says Sodhani. On the other hand, if BJP wins less than 272 seats in the final results, despite the NDA clearly crossing the majority mark — indicating stability in government as well, Sodhani thinks there may be a knee-jerk reaction in stock markets.