Markets saw the biggest gains in nearly six years today, riding on the feelgood factor of exit polls showing a thumping victory for the BJP-led coalition currently in power. Share prices jumped sharply across all major indices. Markets however, are emotional more than logical, especially in the midst of election fever. So it would serve retail investors well to keep a few things in mind, rather than be swept away by the excitement.
1) The accuracy of the exit polls: Exit polls in India and other emerging markets don't have a great track record. Voters in India are wary of disclosing their actual votes, since parties tend to discreetly dole out money before elections to voters in exchange for the promise of their vote (it is the biggest open secret of India's election cycle, one that the Election Commission and other bodies have failed to effectively do away with).
Adding to voter secrecy is the undersampling of specific demographics such as the women's vote. In many rural regions, particularly the north, women will not speak to people conducting exit polls (ie strangers) and therefore their preferences are regularly under-sampled. If these votes go against the BJP, it is possible that the true vote count will not reflect exit poll results.
2) Rise in petrol and diesel prices: Oil and marketing companies kept oil and diesel prices deliberately low in the months of April and May, in the leadup to the election. However, the price of Brent crude per barrel has been steadily climbing as tensions between Iran and the US escalate, and OPEC so far has not committed to production increases to compensate the absence of Iran oil in the market. This is likely to drive up costs for Indian businesses across sectors,
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3) Economic fundamentals: The stock market euphoria ignores right now, slowing fundamentals in the economy, visible in auto sales, inflation, and stresses in borrowing capital that have slowed GDP growth and employment creation. These problems will have to be tackled quickly by the new government, for any market rally to be sustainable.
