Bloodbath on D-Street explained: Why markets suffered bear attack on LS Polls vote counting day; what next?

In the most significant single-day drop witnessed in four years, the benchmark stock indices, Sensex and Nifty, plunged by nearly 6 percent on Tuesday as vote counting trends indicated that the ruling BJP might not secure a clear majority in the Lok Sabha Elections 2024.

Reversing the sharp gains from Monday, the 30-share BSE Sensex plummeted by 4,389.73 points or 5.74 percent, closing at a more than two-month low of 72,079.05. During the day, the index nosedived by 6,234.35 points or 8.15 percent, reaching a level not seen in nearly five months at 70,234.43.

Similarly, the NSE Nifty witnessed a significant tumble, declining by 1,982.45 points or 8.52 percent to 21,281.45 during intraday trading. It ultimately closed at 21,884.50, marking a sharp decrease of 1,379.40 points or 5.93 percent. This decline was reminiscent of the approximately 13 percent drop experienced on March 23, 2020, when the COVID-19 lockdown was imposed.

Also read: Stage set for NDA 3.0, PM Modi's 3rd term despite INDIA Bloc's big gains; state-wise results, voter share here

The market downturn was driven by heavy profit booking across various sectors, including PSUs, public banks, power, utilities, energy, oil and gas, as well as capital goods shares, dragging the indices into deep negative territory.

Several major companies witnessed significant declines, with NTPC plunging over 15 percent, followed by State Bank of India, Larsen & Toubro, and Power Grid, each dropping more than 12 percent. Other notable laggards included Tata Steel, IndusInd Bank, Bharti Airtel, ICICI Bank, Axis Bank, Reliance Industries, and JSW Steel.

Conversely, Hindustan Unilever saw a 6 percent increase, while Nestle climbed 3 percent. Tata Consultancy Services, Asian Paints, and Sun Pharma also registered gains. However, with the exception of FMCG, all sectoral indices closed in the red.

The results from the Lok Sabha elections on Tuesday revealed disappointing outcomes for the BJP-led NDA, particularly in its strongholds such as Uttar Pradesh, Haryana, and Rajasthan, despite expectations of securing around 290 seats to form the government.

Decoded: Why markets crashed on Lok Sabha Election Results day - Expert view

Vinod Nair, Head of Research, Geojit Financial Services was quoted by PTI as saying, "The unexpected outcome of the general election sparked a wave of fear selling in the domestic market, reversing the recent substantial rally. Despite this, the market maintains its expectation of stability within the coalition, led by BJP as the major election winner, thereby mitigating substantial downside in the medium term. This is likely to lead to a major shift in political policy with a focus on social economics, which will have a positive effect on the rural economy."

Umesh Kumar Mehta, Chief Investment Officer, Samco Mutual Fund, Mumbai told Reuters, "Markets have dropped today as they are now pricing in a likely change in governance structure because the current leads/trends hint at an alliance and not an absolute majority for BJP, which was the case in the last 10 years."

"If it is a National Democratic Alliance (NDA) coalition government, then markets will wait for the budget to get clarity. Till then, we expect markets to be in a state of flux and they will try to correct or settle down at or around this levels. If there is a fractured mandate, we think markets should be further nervous. But so long as the current leadership and the Prime Minister stays, the drop will not be massive," he added.

Malcolm Dorson, Senior Portfolio Manager and Head of Emerging Markets Strategy at Global X, New York, provided a global perspective, stating that investing in India is about much more this election. "We are positive on prospects for the election outcome, but investing in India is about much more than this election. It's a 20-year story, and not one the depends on the next 2 weeks," he told Reuters.

"However, it is exciting as this election brings a spotlight to India, not only as an opportunity to present its recent improvements, but also to showcase its massive runway for growth. The election also shines a light on India as a rising star built on democracy, just as China feels pressure from international investors," Dorson added.

According to Gary Tan, Portfolio Manager, Allspring Global Investments, Singapore, "As the India markets have rallied into the elections with expectations of a decisive win by BJP and its allies, anything less than a 350 seat win by the ruling coalition can result in a meaningful short term pull back in the India market."

Meanwhile, Siddhartha Khemka, Head Retail Research, Motilal Oswal Financial Services, Mumbai, provided inputs on why Nifty suffered a sharp drop today. He told Reuters, "The sharp drop in Nifty is because the results, although early trends, presents a picture that is a lot different from what the exit polls had shown. A 10% variability from the exit polls is something that the markets would have absorbed easily."

"The market does not want a hung parliament or a coalition government, where you will have a lot of delays in decision making," he further added.

As per Madhavi Arora, Lead Economist, Emkay Global, Mumbai, believed that victory margin may determine how aggressively the next round of labour, capital, and land reforms is implemented. "The upcoming budget will become all the more important to gauge any shift in policy priorities, especially with regards to spending mix of capex and revex," Arora told the news agency.

Gaurav Dua, Senior Vice President and Head of Capital Market Strategy, Sharekhan, Mumbai, stated it is clear from the early results patterns that the markets are not doing well. However, he added that the overall decline will only be a transient response as long as the BJP/NDA is able to secure the 272 seats needed to form the government.

"Obviously the early results trends are not positive for the markets. But to be sure, as long as the BJP/NDA manages the 272 seats required to form the government, the drop will be only a short-term reaction overall. But being in an alliance could deter the BJP, if it wins, from taking reforms that are not very popular, but rather structural," he told Reuters.

"However, if the results are inconclusive and we get a fractured mandate, then the NDA will have to attract some independents or other parties, which is never a good news for the market," he further stated.

Also read: 'In 3rd term, India will write chapter of big decisions...' PM Modi in his first address after LS poll results

Stock market trends after Lok Sabha Elections: What history tells us

Lok Sabha Elections 2004

On My 13, 2004, the election results were declared, ushering in the UPA Alliance to power. The Nifty and Sensex increased by up to 0.77% on results day. On May 13, the Nifty finished at 1,717.5 and the Sensex at 5,399.47. On that day, the Nifty finished at 1,717.5 and the Sensex at 5,399.47.

Over the next six months, until November 2004, the Nifty saw a 10 percent increase while the Sensex saw a 15 percent gain. In the six months following the outcome of the Lok Sabha election, Nifty reached 1900 while the Sensex reached a record high of 6,200.

Lok Sabha Elections 2009

On May 16, 2009, the UPA government led by Prime Minister Manmohan Singh returned to power at the Centre. Following the poll results, the Sensex increased by 2.53 percent and the Nifty by 17.74 percent.

The Sensex gained over 36 percent over the next six months, rising from 12,173.42 to 16,600 at November 2009's close. The Nifty moved up around 15 percent to scale 5,000 levels for the first time by November end.

Lok Sabha Elections 2014

When the Narendra Modi government took office on May 16, 2014, the Sensex surged by 261.14 points or 0.90 percent, settling at 24,121.74, while the Nifty rose by 79.85 points or 1.12 percent to 7,203. Intra-day trading saw the BSE benchmark hitting the 25,000-mark.

The Sensex increased by about 20 percent over the course of the following six months, from 24,121.74 in May to 28,693.99 at the end of November. In the six months following the poll results, Nifty also increased by almost 17 percent From 7,203 on May 16 to 8,494 by the end of November, it increased.

Lok Sabha Elections 2019

Conversely, on May 23, 2019, the Sensex declined by 298.82 points or 0.76 percent, settling at 38,811.39, and the Nifty ended 80.85 points or 0.69 percent lower at 11,657.05. Notably, the BSE benchmark touched the 40,000-mark for the first time, and the Nifty surpassed the 12,000-level on that day.

In the next months to November, benchmark indices gained up to 5 percent, logging their weakest returns in six months after polls in past four elections. Sensex moved from 38,811.39 to 40,575.17 by November end while Nifty rose from 12,073.75 to 11,657.05 in 2019.

Key triggers to keep a watch in next 6 months

According to experts, stock markets have mostly factored in a victory for the BJP-led NDA alliance in the 2024 elections, and following the exit polls, the stock market reached all-time highs. Investor caution has prevailed, and market mood may be muted for the next few weeks, given that early trends do not point to a resounding victory for the BJP-led NDA as predicted by exit polls.

Market observers predict that once a clear image of the Lok Sabha election results emerges, investors' attention would shift back to other important issues like policy reforms, RBI policy, inflation, and spending. 

The main event for the stock markets will be the Union Budget, which the new government will propose in July. In the Union Budget, investors will be looking for macroeconomic stability, policy continuity, and additional structural reforms. These elements may improve market sentiment.

Indian stock markets will be impacted in the next six months by both domestic and international variables, including inflation, crude oil prices, foreign direct investment inflows, the US Federal Reserve's interest rate decision, and US bond yields.