What’s driving the market surge in poll season

ONE of the most ferocious bull markets in the last 30 years shows no signs of nervousness in a highly charged election season, which has historically been a period of volatility and uncertainty. The two bellwether indices, the Nifty 50 and the BSE Sensex, have soared to their all-time highs on the back of a relentless upward surge that began in the middle of a global pandemic and continued after a small pause following Russia’s invasion of Ukraine in 2022. The biggest gainers are small-cap stocks in manufacturing, infrastructure and energy sectors, which are now quoting at astronomical valuations.

What does this indicate? Is it confidence in the economy? Or that the BJP-led NDA, which is seen as pro-business, will get another term with a majority? Or does it signal a lack of awareness among the legion of new investors who have swarmed into the market and have never seen a bear market?

The bull run this time, like previous manic ones, is a complex mix. On one hand, the Indian stock market’s rise is a result of a combination of strong corporate earnings, substantial domestic and foreign investments and positive investor sentiment.

On the other hand, there is speculative froth whipped up by short-term traders using algorithms as well as rampant price manipulation in cahoots with promoters, who are allegedly inflating profits. Finally, companies are raising public funds at excessive valuations. Fund managers and genuine long-term investors are concerned that even a sentiment-driven crash could snowball into a crisis, as a vast population of clueless traders takes a big hit and panics. For the first time, what happens in India may have global implications, given that India’s market capitalisation has crossed the $5-trillion mark, placing it among the top five stock markets globally.

The best way to understand what is going on is to look at the changing investor profile. India’s investor population, which had stagnated at two crore for decades before 2020, has trebled in the past four years alone. The National Stock Exchange had over nine crore unique investors at the end of February this year, with the last one crore having joined in just five months. In addition, assets under the management of mutual funds (MFs) rose to a massive Rs 57,25,898 crore at the end of April this year, according to the Association of Mutual Funds in India (AMFI). This number has doubled in five years and increased six-fold over the past 10 years. Monthly contributions through systematic investment plans (SIPs) alone have been over Rs 13,000 crore from around 8.7 crore accounts since 2023. The AMFI’s high profile, collective marketing effort through the ‘Mutual Funds Sahi Hai’ campaign is credited with the growth in SIPs.

Indian MFs are now a powerful counter-balance to foreign institutional investors (FIIs). The FIIs, who were steady sellers, having withdrawn a massive Rs 84,318 crore in 2024, turned buyers only last week. A few years ago, a Rs 85,000-crore sell-off by FIIs in a few months would have led to a severe market crash. This time, domestic institutional investors (including insurance companies) more than counter-balanced the FII sales by pumping in Rs 1,52,620 crore, causing a strong rally. Let’s examine the stock market surge from the perspective of business fundamentals as well as speculative excess.

What makes domestic investors, including institutional investors, bullish is possibly a broad consensus on economic policies among major political parties. The corporate earnings season has significantly contributed to market optimism. Leading Indian companies across pharma, commodities, banking, cement, energy and infrastructure have reported better-than-expected quarterly results, reinforcing confidence in the market’s fundamental strength.

The biggest surprise has been the revival of manufacturing companies — most of them smaller firms and several large public sector companies — which are recording extraordinary profits. The massive government spending on infrastructure, defence and railways has contributed to this. The Reserve Bank of India’s recent bumper dividend of more than Rs 2 lakh crore to the government has also influenced the market positively. It provides additional resources for public spending without increasing borrowing, enhancing the government’s fiscal capacity and stimulating economic growth.

Yet, market manipulation is real enough to have provoked industrialist Harsh Goenka to post how all the malpractices of the Harshad Mehta/Ketan Parekh era are back primarily in Kolkata, with promoters inflating profits (through profit entry) in nexus with Gujarati-Marwari brokers.

According to the market regulator, nearly 35 per cent of people investing in futures and options (F&O) trades are in the 20-30 age group. As with the bull run of the 1990s that ended in the securities scam, these brash and supremely confident investors have high risk-appetite and are attracted by the claimed success (usually false) of peers propagated through social media. Eased into the market through online trading platforms of brokerage firms, they are lured into speculative futures and options trades by unregulated ‘finfluencers’ (financial influencers) through quick online training and the promise of ‘sure-fire’ trading strategies using algorithms (algos). Both algo writers and finfluencers are usually compensated through tie-ups with dozens of stock brokers. These freshly minted investors have never seen a serious dip in the market, let alone a prolonged bear market.

In January 2023, the SEBI (Securities and Exchange Board of India) released a study showing that 90 per cent of the active traders in derivatives like F&Os lost money in FY 21-22. This was up from 87 per cent in FY 18-19, highlighting how harmful derivatives can be. The study had no impact on the segment of investors being warned. The volume of such trading is so large that India now accounts for 84 per cent of all equity options contracts traded globally last year, according to the Futures Industry Association, having doubled since the bull run began in 2020.

Given the combination of factors, nobody really knows what will happen. As the legendary Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked.”