Are markets looking for a positive trigger from election results?

The outcome of UP elections today will set the direction for the Indian stock markets in the week ahead as investors will closely monitor the performance of Congress in the polls. Moreover, it will also dictate the pace of economic policy changes that the ruling party is seeking to bolster the economy’s growth.

A day before the results, the BSE Sensex and the NSE Nifty lost 1 percent each. This is because the performance of the Congress party is key to the central government pushing ahead stalled economic reforms. And most exit polls suggest that Samajwadi Party (SP) will take Uttar Pradesh and leave the Congress with no antidote to Mamata Banerjee, who has been holding up the reforms process for over a year now.

Counting of votes across five states began at 8 a.m. Exit polls released after voting ended March 3 showed the Congress party trailing in fourth place in Uttar Pradesh.

An Edelweiss report says that majority of the exit polls are showing large gains for SP instead, meaning the party could form the government without the Congress’ support.

“If this happens, Congress will be on the back foot; its allies within UPA as well as opposition parties will raise their pitch against Congress, thereby making governance even more difficult,” reports CNBC-TV18. This will be an unfavourable outcome for the economy and financial markets.

Motilal Oswal, CMD, Motilal Oswal Financial Services, told Economic Times that the outcome of the elections will not have a major impact on the market unless there is a serious erosion in support for the Congress or the BJP.

Jagannadham Thunuguntla, a strategist at SMC Global Securities Ltd told CNBC-TV 18 that the results will determine whether Congress will gain in strength and have a freer hand at making policy.

If the Congress doesn’t have a role to play in UP, it means that Trinamool becomes that much more important as an ally to the Congress. SP’s strategies are relatively known, but the news from Kolkata could be the joker in the pack, said industry experts.

Analysts also said that shares of sugar companies will be most affected if Mayawati-led BSP retains power, fearing its pro-sugarcane farmer stance. The regime had doubled the price of sugarcane in its five-year tenure, compared with the SP government, which raised it only 25 percent. Her defeat is definitely sweet news for the sugar sector as sugar companies can hope that the incentive scheme announced by the Mulyalam Singh government in 2007 will be restored if the Samajwadi Party comes to power.

On the other hand, ouster of the Mayawati government may not do well for the Jaypee Group, which is said to have close ties with the BSP regime. Jaypee Group stocks were also the worst affected yesterday.

Experts also believe a win for Samajwadi Party regime will be a big plus for the power sector, especially the ADA Group’s plans for this business, which rallied in a sluggish market yesterday. Markets expect the company to increase its focus on setting up power plants in the state, and set up more infrastructure projects and power projects. Thus if SP does win, as early counting shows, the market could see a 5-7 percent rally today, especially in the ADAG stocks.

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