The stock market has been on a tear recently. It is tempting to conclude that this is based on the market’s expectation of a BJP victory in the current State elections. However, the evidence is not as clear cut as it seems at first sight. Although market participants probably do expect a BJP victory, much of the recent rally can be attributed to global factors, and not to expectations about the election outcome..
The NSE Nifty 50 Index fell to a low in late Dec, and since then it has recovered sharply and gained more than 1000 points, i.e. almost 13%, in about 10 weeks. This could be due to expectations of a victory for PM Modi and the BJP in the current State elections, which would be a market positive event, since it would strengthen the government’s hand and probably allow it to follow a reform agenda. An electoral defeat here will weaken the government substantially, since it would be interpreted as a popular repudiation of major government policies such as the note ban. The 13% run up in the Nifty seems to suggest an expectation that there will be a stock market friendly election outcome on Mar 11.
However, the real picture is a bit different. As we have pointed out before, here and here, the Indian stock market is very often driven by global rather than local factors. For instance, in a December post we pointed out that a Nov decline in the Nifty that looked like a negative reaction to the note ban, was actually driven by a reaction to Mr. Trump’s electoral victory.
In order to sift global factors from local influences, we look at the ratio of the Nifty 50 Index to the MSCI Emerging Markets Stock Index (EM). A rising Nifty-EM ratio means that the Nifty is doing better than emerging markets as a whole, and therefore domestic sentiment is bullish, while a falling ratio shows bearish local sentiment. This ratio, standardised to be 100 in Mar 2016, is shown in the chart below.
The first thing to note is that the Nifty-EM ratio has been rather flat in recent months , and this shows that the Nifty is being driven more by global rather than local factors. Although there is an up move in the last three weeks, it is much smaller than one would expect if it were driven by the anticipation of a big BJP victory. Nevertheless, the market has trended up in the last three weeks, suggesting that it does indeed expect a BJP victory. The smallish size of the rally suggests that market participants do not expect a resounding BJP victory. On the other hand, the lack of any panic suggests that the market is not at all worried about a BJP rout.
A note of caution: none of this meant to speculate in any way upon the actual outcome of these elections. All we are pointing out is that much of the huge rally in Indian stocks in the past 10 weeks is part of a global “Trump Rally”, and has little to do with the market’s expectations about the Indian State election results, and the small residual movement suggests a narrow electoral verdict.