Assembly election 2017: Don't expect huge Sensex rally even if BJP wins; Fed rate hike is on the way
The greater participation of retail investors in the stock market is likely to stem a huge fall even if the BJP's performance does not meet the expectation
A solid start marked the beginning of the trade early Friday, as the Sensex breached the psychological 29,000-mark in no time, clocking around 150 points gains. This was more on expected lines after most of the exit polls announced post the market hours on Thursday predicted robust numbers for the saffron party in the key state of Uttar Pradesh. Barring Punjab, the BJP is also expected to do well in three other states, according to exit poll estimates.
The development is expected to boost the confidence of investors, and if the exit poll predictions are in line with the estimates reform momentum is expected to continue going ahead, said market experts.
So, will the BJP win bring in a fresh wave of upsurge in the markets in coming days?
Stock market experts are not looking at any spectacular rally in case the BJP wins the key state elections, as most of the gains seen in recent weeks were on hopes of a good show by the Centre in these states.
Since 3 February when the state assembly election began in five states, both the key indices, Sensex and Nifty, have gained over 2 percent so far, aided by strong foreign fund flows to the tune of Rs 7,145 crore during the period under review.
One can also gauge the mood of the market based on Friday's trades as well. A day after the poll estimates, there seems to be little enthusiasm among the investors as most of the early gains seemed to have fizzled out with benchmark Sensex now trading with modest gains.
However, market experts also suggest that the lack of optimism in trades on Friday could be due to the ongoing public issue of Avenue Supermart. Being the last day of the D-Mart IPO, most of the retail and institutional funds could have made its way into this public offer, leading to lacklustre sentiment in the broader market, say experts.
"We know the BJP has a clear edge in major states and it is very positive news for the markets. In case the exit poll numbers turn out to be true, the markets may see some gains in initial trades on Tuesday. But going ahead, equity markets may not rejoice much on the poll outcome, as the focus will shift to US Fed meeting scheduled for next week. In fact, a rate hike by the Fed may lead to short-term correction in the market," said A K Prabhakar, Head of Research at IDBI Capital Markets.
Unlike Bihar election results where the exit polls had shown the BJP trailing against the JDU, this time the trend seems to be clearly in the BJP's side which is encouraging, said Prabhakar.
Even in case the poll estimates fail, equity markets may see some initial knee-jerk reaction before witnessing a turnaround sooner, said Prabhakar. According to Prabhakar, the Nifty could breach the all-time high of 9,119 on a BJP win and find support at 8,600 level in case of an adverse poll outcome.
In the past, any adverse poll outcome had resulted in a steeper correction, atleast, in next few sessions. However, the sentiment has changed over past few years with the greater participation of retail investors in the stock market helping stem the fall.
The exit polls have predicted significant improvement for the ruling party at the Centre. If this prediction becomes true, it could be sentimentally positive for the equity markets for a week or so. However, in our view, fundamentally speaking, whether the ruling party gains or loses, it doesn’t have significant relevance for the markets, said G Chokkalingam, Founder & Managing Director, Equinomics Reserarch & Advisory.
Of course, if the ruling party gains or loses in a big way in UP (which is the biggest state in terms of number of members contributed to both Lok Sabha and Rajya Sabha), the market may see a knee-jerk reaction for a day or two due to the perceptions, but it is most likely that the markets would forget the outcome of elections within a week or so, added Chokkalingam.
However, most important point is that there is no solid economic reform (from the context of stock markets), which is pending for the majority support in the Rajya Sabha. Even the toughest one viz., GST has already gone through all major hurdles.
Hence, the valuation of the whole market or individual stocks and continued flow from the FIIs would be the dominant factors, which would decide the course of market directions ultimately, rather than the “state elections outcome”. Like Bihar elections and the Budget, this event would also be forgotten by the equity markets within a week or so, said Chokkalingam.
Data input by Kishor Kadam
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