Traders on D-Street have turned cautious ahead of the exit polls as unpredictability rises ahead of Lok Sabha elections 2019 results. (Photo: Reuters)

As the nation ushers into the seventh and final phase of polling in the Lok Sabha elections on Sunday, voters are eagerly awaiting exit poll results as anxiety grows.

While it has been an exhaustive election for voters, uncertainty over the poll verdict has also kept Indian stock markets on tenterhooks.

Volatility in the stock markets has surged significantly ahead of crucial exit polls, which is the final prediction before the election result becomes clear on May 23.

However, trade analysts on Dalal Street are certain that the result will not dampen market prospects for a prolonged period after the results.

So, why then, have investors turned cautious ahead of the exit polls on May 19?

According to market experts, unpredictability during the period of any ongoing election is common, and the impact it has on stock markets can be accurately assessed at least two months after the results.

Anxious market

BSE Sensex and NSE Nifty--the two benchmark Indian share market indexes--recovered from a 9-day losing streak on Wednesday but failed to shrug off anxiety among investors who are worried about the final results.

At Thursday’s closing, a late surge helped Sensex ended 278.60 points higher while Nifty edged past 11,250 points. If it had not been for the pre-session rush, triggered by a surge in IT and metal stocks, markets would have been staring at another dull day.

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In the run-up to the exit polls, BSE Sensex lost nearly 2,000 points in market valuation over the last few sessions before ending its losing streak a couple of days ago. To be precise, Sensex lost 1,977 points or over 5 per cent since April 26.

Meanwhile, NSE Nifty also lost over 600 points as May 19 inches closer.

Fresh concern over the US-China trade tussle, wider trade deficit and growing anxiety over Lok Sabha elections 2019 led to the recent fund erosion in the Indian stock market, according to market analysts.

Escalating trade tussle between the US and China also added to the woes of Indian stock markets. (Photo: Reuters)

It is no secret that equity markets prefer stability and any disruption--domestic or global--leads to a slump in stock valuation and fund outflow. But most traders believe that markets will normalise after a brief period of turbulence even if exit polls forecast shows an unexpected result.

Historically, the Indian share markets have rallied significantly in the 2-6 month period leading up to any election--provided there is little or no external shocks--and the period after the results are declared.

How stocks react to exit polls

Let’s take into account the recent high-voltage state assembly elections held in Rajasthan, Madhya Pradesh, Chhattisgarh, Telangana and Mizoram. A week after the exit poll data was released, Sensex lost over 650 points while Nifty shed nearly 1.5 per cent a week before results were announced.

A sharp slump was seen after exit poll results were released for the five state assembly elections on December 7, 2018. (Photo: BSE India)

External factors like oil prices also added to the post-poll market corrections but experts note that such events have been traditionally followed by--almost immediately or in within the next six months--a sharp rise in market valuation.

Market corrections signify a decline of 10 per cent or more in the price of a share or equity from its peak. Corrections can affect an individual stock, an entire index, sectors, commodities and currency markets.

Analysts have highlighted in the past that state elections do not directly affect the stock markets but add that a knee-jerk reaction is unavoidable.

They argue that most of the corrections witnessed during state elections are not long-term in nature and markets continue rallying if the government at the centre does not create an anti-business environment.

Ambareesh Baliga, an independent market analyst, wrote an article in the run-up to assembly elections in five states last year, where he explained that BJP’s dampened prospects could slowdown market growth briefly but the effect will be shrugged off within six months.

And that is exactly how it panned out. Despite a new Congress government in three BJP-dominated states, markets shrugged off the short-term losses almost instantly.

When the results to the tightly-contested assembly elections were announced on December 11, Sensex gained 200 points while Nifty reclaimed the psychologically important 10,500-mark.

Fast-forward six months and the markets have continued their upward climb, albeit frequent plunges witnessed till February due to escalating trade war tensions and other external factors including global crude oil price hike.

Rising oil prices have also contributed to the volatility witnessed in the stock market ahead of the crucial exit polls. (Photo: Reuters)

But will markets be able to stage such a quick recovery after the final result on May 23?

General elections 2019 and the stock market

Compared to state assembly polls, the general elections are far more decisive for the Indian equity market and investors. Historically, general elections in India have on most occasions provided a post-poll boost to the market, with 1999 being the only exception.

Manishi Roychaudhuri, MD, Head of Equity Research, Asia Pacific, had earlier termed the general elections as an important influencer as it dictates short-term returns and foreign fund flows into the market.

Roychaudhuri explained that investors always hope for a stable, market-friendly government as it dictates overseas investments for at least one or two months.

In the last six months, the stock markets have rallied exponentially and in April, the 30-share BSE Sensex touched an all-time high of 39,364 while Nifty crossed the 11,800-mark.

BSE Sensex performance over the last six months (Photo: BSE India)

Despite trailing global peers for the first two months of 2019, benchmark Sensex jumped more than 6 per cent in March, leaving behind many international markets including US’s Dow Jones.

NSE Nifty, too, consolidated ahead of the general elections as investors rushed to buy shares amid volatility.

While stock markets continued rallying upwards in April, sentiment on D-Street turned brittle in May as investors turned watchful ahead of the exit polls. One of the major reasons behind the development, according to analysts, is uncertainty over the general elections outcome.

Analysts from foreign brokerage UBS Securities India indicated that markets could correct at least 10-15 per cent if a non-NDA government comes to power. However, the decline in the market is expected to fade away after a short period of turbulence.

Past outcomes

2004

Analysts are confident that despite rising ambiguity, markets will recover fully in the upcoming six months after an initial slump. The trend was witnessed in Lok Sabha elections of 2009 and 2014.

However, the same cannot be said for the general elections held in 2004 when markets gained in the pre-poll rush but fell flat after the final verdict became clear.

While Sensex touched an all-time high of 6,250 points, it slid to 4,300 points by the middle of May, shedding almost 2,000 points. It happened soon after the Congress and its allies beat exit poll predictions on May 10, 2004, to emerge victorious a few days later.

The unexpected victory of UPA led to a sharp post-poll correction in 2004 (Photo: Reuters)

According to stock market records, markets were down just 1 per cent in the last two months before polling but markets corrected sharply after UPA formed the government with added support from the left, surprising investors who were predicting a win for the NDA.

Just days after the BJP and its allies conceded defeat on May 13, Sensex crashed 842 points, showing instability in the markets. It could have led to a much larger probe if the stocks would have failed to stage a recovery.

2009

A different scenario was witnessed in 2009 when BSE Sensex rose over 18 per cent in the two months that preceded the Lok Sabha elections. Sensex gained at least 24 per cent just a month after UPA II came to power.

The fading effects of the global economic recession also started reflecting on the market as investor confidence got a significant boost.

When the exit polls came out on May 13, 2009, investors already turned euphoric as the UPA was expected to come back to power. Just two days after the final verdict was out, markets surged 17 per cent.

In 2009, markets welcomed the UPA II government with positivity and continued its bull run for the next 18 months (Photo: Reuters)

The reason for the excitement was sideways movement in the market from October 2008 to March 2009. Markets not only outperformed expectations but also maintained its bull run for the next 18 months, with BSE Sensex registering an increase of over 60 per cent in valuation.

2014

Similar to the scenario in 2009, markets were expecting the BJP-led NDA government to form the government and their belief grew stronger ahead of the results on May 16, 2014.

Since market investors were already predicting a victory for the BJP-led NDA coalition government, BSE Sensex gained almost 11 per cent in the two-month period before the election results were declared.

Soon after the exit polls revealed an outcome in favour of the NDA coalition government, BSE Sensex crossed 24,000 points for the first time.

The strong mandate in favour of the Narendra Modi government also reflected on the stock market (Photo: Reuters)

Unlike the elections of 1999 and 2004, volatility also reduced sharply and the development agenda of the Narendra Modi-led government filled the stock market with fresh hope.

But five years have passed and the perception of the government has also changed significantly among traders and investors.

While markets are hoping for an NDA win as It will cause minimum disruption, markets analysts have assured that trade would not be hindered for a prolonged period in case of an upset.