Elections over, markets to now focus on earnings, budget, macros

As regards continuation of policies and reforms, analysts now expect the budget to be a key indicator of what the government has in mind

With the Narendra Modi-led Bharatiya Janata Party (BJP) likely to be back in driver's seat in Gujarat and a possible win in Himachal Pradesh (HP) in the recent assembly elections, analysts expect markets' focus in the short-to-medium term to shift back to macro-economic data, corporate earnings growth, pace of reforms and the upcoming budget in February.

The outcome of the Gujarat state elections was being viewed by many as a referendum on the Prime Minister's performance, especially the implementation of the Goods and Services Tax (GST) with a bearing on future economic policy decisions. The S&P BSE Sensex shed over 800 points to hit an intra-day low of 32,595 levels but clawed back over 1,100 points as trade progressed.

"The election outcome in Gujarat has been a closer call than what the markets had expected. These results should be seen as a wake-up call for the government as regards how some of its policies, like the goods and services tax (GST) bill, have been handled. It is possible that some of the remunerative steps that have been undertaken in November may have come in a little late," says Tirthankar Patnaik, India Strategist at Mizuho Bank.

Given the liquidity driven rally thus far in calendar year 2017 (CY17) that has seen the benchmark indices - the S&P BSE Sensex and the Nifty50 - rally nearly 26 per cent higher, analysts do not see a repeat performance going ahead in CY18. Corporate earnings growth, policies spelt out in the upcoming budget in February and other geopolitical developments are some of the key variables that will decide the market trajectory, they say.

"With the elections now over, the markets will now go back to looking at fundamentals, which I feel are not so great. That said, the liquidity-driven rally may continue for the balance of the year (FY18). Monday morning was a warning sign of what could come if there is some real negative news. There are no fundamentals to hold the markets. Over the next one year, the (market) returns should move in line with earnings growth, say around 15% from here on," suggests Andrew Holland, chief executive officer, Avendus Capital Alternate Strategies.

Overseas funds put in $8.2 billion in Indian markets, roughly half of the inflows received by all the key emerging markets (EMs) put together, data show. On the other hand, mutual funds have invested over Rs 1-lakh crore in CY17.

As regards continuation of policies and reforms, analysts expect the budget to be a key indicator of what the government has in mind. The government, they feel, is likely to spend more towards rural economy and infrastructure. Though the measures may seem populist, these are needed to rev up the economy and put it back on the 7 - 8 per cent growth trajectory, experts suggest.

U R Bhat, managing director at Dalton Capital, for instance, expects the budget to be reasonably populist as it would be the last full budget ahead of the general elections scheduled for May 2019. "The indices could gain 3 - 5% from hereon over the next few months, provided there are no negative surprises," he says.

Given this backdrop, Holland of Avendus suggests investors steer clear of pharma and power sectors. The information technology (IT) sector is probably seeing the worst times and will take time for the restructuring for the companies in this space to come through, he feels, and remains bullish on private banks, housing finance and the auto sectors.

Patnaik of Mizuho Bank, too, expects the markets to trail broad earnings growth. He sees the markets around 10 - 12% higher over the next one year from the current levels and suggests investors look at commodity-driven sectors for investment from a year's perspective.