Markets give thumbs-up; expect mini-celebration on BJP-win

Though some experts say that the poll outcome was largely in line with expectations, others believe indices should still see gap-up opening and rally to sustain over the next few sessions

It would be nothing short of a mini-celebration on the bourses on Monday as the market opens a day after the Bharatiya Janata Party (BJP) breezed through elections in three of four states. The popular indices are expected to open with a gap-up and possibly breach all-time highs on Monday on hopes of a similar victory for the BJP-led National Democratic Alliance (NDA) in next year’s general elections.

“Markets are sentimental and will react positively tomorrow because the BJP has won more seats than expected in Rajasthan and Madhya Pradesh. Markets would now look forward to a stable government at the centre (post 2014 general elections),” said Nirmal Jain, Chairman, IIFL.

“Poll results will have positive implications on markets. Inflation has had its impact on elections. Markets need a pro-growth government with low inflation. Good non pay-roll data from the US already has its positive impact on global equity markets including emerging markets. With these factors put together it will augur well for Indian markets,” said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management.

Although some experts like Sanjeev Prasad of Kotak Institutional Equities and Deven Choksey of K R Choksey believe that the market had more or less priced in the elections’ outcome, others are more positive and believe that markets could still see gains in the next few sessions.

Rajesh Cheruvu, chief investment officer, RBS Private Banking, adds, “I think the markets will take the result outcome very positively. I think the impact will be seen tomorrow itself with the markets opening up with a gap. The rally is likely to continue with the Nifty scaling up to new highs – possibly 6,400 to 6,500 levels – in the near term”.

The possibility of a BJP-led government in the centre has markets enthused as Narendra Modi and the BJP-led NDA are considered to be more reform-oriented and industry-friendly than the current Congress-led United Progressive Alliance.

“It reaffirms our view about silent transformation in Indian politics that voters are giving decisive mandate to leaders pursuing an agenda focussed only on 'growth and governance' and completely rejecting the 'dole out' policies. Markets would be enthused as this is very positive for the economy in the long run,” said Navneet Munot, chief investment officer at SBI Mutual Fund.

The international broking community have also been cheering a BJP-led government at the centre. They have especially been supportive of its prime ministerial candidate Narendra Modi who they believe is good for the Indian stock market owing to his business-friendly stance. Ace stock-market strategist Christopher Wood of CLSA in his report ‘Greed & Fear’ predicted a ‘dramatic rally’ if Modi could get a visible majority.

“This is because business confidence will rise dramatically, and with it, the chances of a new investment cycle. If BJP gets to 190-200 seats on its own, it will be in a strong position to form a viable coalition government,” he said in his report.

Other investment banks like Goldman Sachs, UBS, Credit Suisse and Bank of America Merrill Lynch have also been vocal about a BJP-win drastically improving the outlook for the Indian stock market.

Macquarie Securities’ Head of Research, Rakesh Arora says, “The state election results are a 3.5:0 in favour of BJP and they have won close to an astonishing 68% of the seats being contested in these four states. Markets should get confidence from this performance and will extrapolate these results for the possible outcome for general elections due next year.”

Benchmark indices, BSE’s Sensex and NSE’s Nifty could scale new highs as euphoria around the BJP-win has markets enthused. The NSE Nifty is expected to touch levels of 6,450-6,500 level while the Sensex could touch 21,300-21,350 levels, analysts said.

On Friday, the BSE Sensex crossed the 21,000-mark only to settle down at 20,996, up 0.9% from the previous week’s closing of 20,792. NSE’s Nifty gained 1.3% during the week to end at 6,259 after having touched a high of 6,300.

The Sensex touched its all-time high earlier this year. A day before the Muhurat trading session, it closed at 21,239 after making an intra-day high of 21,321.53. The NSE Nifty posted a record closing-high of 6,317 but could not breach its all-time high of 6,357 on that day.

However, participants believe that the impact of the BJP’s decisive victory in Madhya Pradesh, Rajasthan, and Chhattisgarh on the market could fizzle out after the first few trading sessions, as other events catch attention. They are being watchful of levels beyond 6,500 and feel it is unsustainable. That’s because, experts said that most foreign institutional investors had already been long on the market prior to the exit poll results in anticipation of a BJP-win. While some chose to sit on the side-lines and booked profits post the exit poll results, most are already heavily invested in the markets.

The next trigger for the market, after the election euphoria has died down, would be the US Federal Reserve’s Federal Open Market Committee (FOMC) meeting to be held later this month on December 17 and 18. This would be followed by the Reserve Bank of India’s policy review on December 18.

With the US posting strong data, the Fed, in its FOMC meet, could decide on a specific time-line on pulling the plug on its stimulus package – the Quantitative Easing (3). Although the pull out is likely to be gradual, it is likely to impact foreign flows into emerging markets.

The RBI, for its part, could hike key policy rates if it perceives inflation data to be above its comfort zone. CPI data for the month of November will be released later this week on Thursday. A high inflation number could impact markets negatively in anticipation of a 25-bps rate hike by the RBI.

Markets would also keenly watch the trade and industrial production data which are expected to be released later this week.

Going forward, market participants expect to see further upside in stocks of the banking, capital goods and other infrastructure-related sectors in anticipation of policy reforms which could boost their prospects. That investors have already started investing in stocks from such sectors is reflected in the rise in the share prices, and profit booking in IT, pharma and FMCG. However, some experts also see them as high risk-high reward bets until the formation of a stable government at the centre, and hence, are not recommending a complete shift. They say, the uncertainty regarding the government formation at the centre along with the on-going recovery in US and developed economies means that sectors like IT and healthcare will also continue doing well.