Through numerous studies on ‘January Effect’, ‘Monday Effect’, ‘Weekend Effect’, ‘October Effect’, ‘Calendar Effect’ and so on, stock market pundits are familiar with the manner in which expectations, emotions and sentiment can affect stock market performance. Now there is a new ‘Modi Effect’ which could be a case study of considerable interest for behavioural finance believers. It shows how a directional change was brought into the Indian stock markets, which were see-sawing under the uncertainty of how the impending electoral verdict may impact the future of the Indian economy, and the perception that leadership change could be beneficial.
The major mover in this case is a common man, Narendra Modi, who connects himself to the economically disadvantaged in India. His is an an inspirational story of a man raised with limited financial resources, who worked his way up the hierarchy, to provide exemplary leadership to Gujarat for some decades, with his vision, commitment, diligence and charisma.
When Narendra Modi was officially declared the Prime Ministerial candidate of Bharatiya Janata Party on September 13, 2013, a new chapter in the political history of India began. Since his initial public rally on September 15, 2013 in Rewari, Haryana, Modi emphasized on a strong Government at the centre, coupled with national security, good governance and economic development. His convincing message was carried forward by the crowds who predicted that Modi is going to be the ‘bhaavi pradhan mantri’ who can deliver.
Since then, as BJP’s Prime Ministerial candidate, Narendra Modi created a record in Indian political history, with around 5,385 public appearances that include rallies, TV interviews, conclaves, chai pe charchas etc. He travelled over 3,00,000 kilo meters and addressed 440 large rallies - his last being in Balia, Uttar Pradesh on May 10, 2014. All through his marketing campaign he displayed conviction and commitment of purpose, always reinforcing the message of good and corruption-free governance, a strong and stable government for the country and all inclusive economic development.
Impact ON INDIAN STOCK MARKETS
In the midst of a slower than expected global recovery, political turmoil in some countries, the stock markets of India were recently languishing largely on account of opaque decision-making by the Central Government, high inflation and declining economic growth. The positive sentiments and emotion-led expectations created by Modi brought in euphoria that helped to make the Indian stock markets the best performing markets in the world.
Incidentally, if someone takes into consideration the conversion rate, INR has strengthened by about 5.95 per cent over the same period and by about 13.42 per cent since the INR touched a low of 68.61 on September 4, 2013 against the USD. Hence, if we take into account the appreciation in INR, the price return over September 12, 2013 would be 32.27 per cent and as high as 39.74 per cent. Over the same period, the Egyptian Pound depreciated by 1.73 per cent, taking the gains down to 38.48 per cent, making India the most attractive stock markets of the world vis-à-vis other emerging markets and the developed markets.
The 2014 Poll Campaign of BJP began with Modi being declared the Prime Ministerial on September 13, 2013 and continued on a very calculated path with a fierce attack on the ruling Congress-led UPA on various issues of serious national concern such as corruption, security, infiltration and above all on economic disaster brought in on the country with (quote IMF) “unprecedented widening of India’s current account deficit, macro-economic imbalances, structural weaknesses, high inflation, large fiscal deficit, binding supply constraints”. The ruling Congress Party and its allies had no issues against the BJP , except calling them ‘communal’ , which subsequently became personal such as ‘Modi’s Gujarat Model’ , ‘land allocation scam in Gujarat’ which created a larger than anticipated image of Modi. It seems both the odds and evens worked in favour of Modi , thus creating a Modi wave.
Through the BJP’s campaign, a combination of many issues that added to the Euphoria in the stock markets are presented in the ‘Event Box’ below.
The euphoria was so intensive that on the ‘Victory Day’ May 16, 2014, the NSE Nifty Index touched an intraday high of 7,552.60 and closed the day at 7,203 with a gain of 1.12% and a record turnover of Rs. 21,057.07, highest ever turnover on the NSE since its inception.
Apart from value appreciation and increase in turnover, the ‘Modi Effect’ also brought in stability and provided positive direction to the stock markets of India.During 2013, since Modi was declared BJP’s Prime Ministerial candidate, the NSE Nifty Index recorded 7.77% of the total price return of 8.12%, and the volatility reduced to 9.1% from 17.96% for the entire year. Similarly, the direction of the market changed from a negative 5.7% skewness for the entire year to a positive 69.62%. The markets continued to remain bullish (positive skewness of 46.39%) with a record gain of 13.49% in NSE Nifty, with further lower volatility of 7.75% during 2014 until the Victory Day- May 16, 2014.
As of now, the stock markets at least have given a thumbs-up to Modi and the BJP. Now it is time for Modi and BJP to live up to the expectations and win the trust of the people of India. If they succeed in doing so, we can expect a strong bullish trend going ahead, as reflected in the technical signals of long-term valuation trends and dividend yields presented below. We expect NSE Nifty to cross 7,500 marks in the current rally and will continue to touch new highs during the coming year.
(The writer is Global Investment and Capital Markets Strategist at SMART International Holdings, Inc.)