AAP effect: After sizzling 2013, foggy start for Sensex in 2014

MUMBAI: Could the market be turning? After a surge late in 2013 signalled improved prospects, it's not really been a Happy New Year for the Sensex so far.

Foreign institutional investors (FIIs), so full of certainty at the end of last year, seem to have again been assailed by doubt as domestic political worries, the possibility of non-state companies being examined by the government auditor and global economic factors weigh on the markets.

The Sensex fell for the fifth consecutive session, possibly the worst beginning-of-theyear performance since 1996, when the country was in the grip of political uncertainty ahead of elections. That year saw the United Front forming a government that wasn't able to complete its term.

Eighteen years on, markets are worried about populist measures taking hold following the surprisingly strong showing of the anti-corruption Aam Aadmi Party (AAP) in the recent assembly elections that led to it forming the government in Delhi.

Such a surge during the general election could mean AAP winning seats in Parliament, and possibly a fractured verdict. Markets had risen last year on investor perception that the Narendra Modi-led Bharatiya Janata Party was advantageously placed ahead of the election.

In the first five trading days of the New Year, the Sensex has dropped 2.26%, or 477 points, closing at 20,693 on Tuesday, when it declined a further 0.45%.

The broader index CNX Nifty of the National Stock Exchange fell 0.47% to 6,162 on Tuesday. Both the Sensex and Nifty are down 4% from their all-time high on December 9, reached a day after results of state elections were declared.

MARKETS CONCERNED ABOUT AAP

BJP had won in three states and bagged the highest tally in the fourth. However, the saffron party declined to form the government in Delhi as it didn't have a majority. AAP later formed the government in the city state with the backing of Congress, which suffered heavy losses in the assembly polls. "Markets are concerned about the rising momentum behind AAP," said Andrew Holland, CEO, Ambit Investment Advisors.

"There are expectations that the new party's rise in elections could lead to a hung Parliament." FIIs - which bought stocks worth $20 billion in 2013 and sent the markets to new highs - are net sellers so far this year. They offloaded stocks worth Rs 463 crore between January 1 and January 6.

Domestic institutional investors sold shares worth Rs 692 crore. Provisional figures on Tuesday suggested that FIIs were net sellers worth Rs 567 crore. The rupee, consequently, is down 0.83% so far this year, having ended at 62.30 per dollar on Tuesday.

Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services, said, "The next key trigger for markets will be an indication from RBI on interest rates and the manifestos of political parties for elections. But markets may see any significant move only after election results now."Agreed Avinish Gupta, managing director and head of institutional equities, Bank of America Merrill Lynch. "There is no clear picture emerging on the political front, which can cause volatility in markets in the run-up to the elections," he said.

"Markets will trade in a narrow range till elections," said Nirmal Jain, chairman, IIFL. "There seems to be some negative bias in markets as people are not sure if any party would get a decisive mandate."

Adding to the uncertainty was the Delhi High Court order on Monday allowing private telecom companies to be examined by the Comptroller and Auditor General. Investors feel increased regulatory activism could further dent business confidence and investment prospects. To be sure, the effect on telecom companies has been mixed, with Bharti gaining 0.87% to Rs 331 and Idea Cellular rising 1.6% to Rs 162 on Tuesday, although the latter declined 1.9% on Monday.

Reliance Communications fell 1.07% to Rs 129 on Tuesday. A series of corruption scandals that rocked the Congress-led United Progressive Alliance government came to be unearthed partly by such audits, but the fear instilled by this process also led to decision-making being stalled.

Meanwhile, Tata Power and Reliance Infrastructure have fallen 10% and 5%, respectively, since January 1 owing to the AAP-led Delhi government's move to order an audit of these companies that supply power in the city. Holland of Ambit Investment Advisors also believes that third-quarter results that companies will start declaring next week could deepen the sense of disappointment.

Infosys, which will be among the first to declare earnings, fell 1.62% to Rs 3,457 on Tuesday. TCS dropped 1.4% to Rs 2,208 and Wipro fell 1.45% to Rs 549. Among others, Reliance Industries fell 1.49% to Rs 842 and State Bank of India fell 1.65% to Rs 1,659. Gupta of Bank of America Merrill Lynch said the US Federal Reserve's plan to start withdrawing its stimulus programme is also having an effect.

"There has been a small sentiment change which is led by the Fed deciding to start tapering earlier than expected," he said. Markets in the region also fell. Asian markets slumped to a near four-month low on Tuesday after disappointing US services sector data.