Election results: Stage set for a market rally but Fed in play
BJP’s big win in Uttar Pradesh seen lifting market sentiment, but some analysts remain cautious, citing weak earnings growth and a likely US Fed rate hike
Mumbai: A landslide win for the Bharatiya Janata Party (BJP) in Uttar Pradesh will give fresh impetus to a rally in Indian stocks, propelling them to new highs, say analysts.
Some experts, however, warned that investors should not get carried away, given the shaky macroeconomic backdrop, poor earnings growth and a likely interest rate hike by the US Federal Reserve later this week.
On Saturday, the BJP won an unexpected 312 out of 403 seats in the assembly elections of India’s largest state, raising expectations of continued political stability, smooth implementation of a proposed goods and services tax and reforms in areas such as labour laws and land acquisition.
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“The stock market will surely rejoice with a possible 150 point rally on the Nifty” when markets open on Tuesday, said Amar Ambani, head of research at financial services firm IIFL. The election victory “firmly puts the central government’s focus back on the reform path, which will enthuse markets minus any farm waiver as promised on win in UP”.
In its election manifesto, the BJP had promised a waiver on crop loans for small and marginal farmers and interest-free crop loans.
So far this year, the markets have rallied on a spate of liquidity. The benchmark indices have gained around 9% each, outperforming the MSCI Emerging Markets Index’s 7.4% gain. Foreign institutional investors have pumped in $2 billion so far this year after taking out $4.6 billion in the last three months of 2016.
The Nifty closed on Friday at 8,934.55 and a 150-point rally, as predicted by Ambani, will take it within spitting distance of its all-time high of 9,119.
“Pace of passing reforms will be key and any slowdown will disappoint markets,” said Prakash Diwan, a director at Altamount Capital Management Pvt. Ltd.
Still, some analysts say that this euphoria might be tamped down because of lack of support from fundamentals, rising valuations and the fact that the path to reforms will be long and arduous. As Mint reported on Saturday, despite the massive win in Uttar Pradesh, BJP is unlikely to gain a Rajya Sabha majority until the next general elections in 2019.
“Except for agri or UP-related firms boosting consumer sentiments, nothing much will change post-election results,” said Taher Badshah, chief investment officer (equities) at Invesco Asset Management (India) Pvt. Ltd. “The BJP win will only protect the downside but earnings rebound and global recovery are more important factors for markets.”
While the Reserve Bank of India said that the impact of invalidating 86% of the country’s currency notes will be transient, some experts say that March-quarter earnings will bear the true brunt.
“Full-year results and fiscal year 2018 guidance will decide course of markets momentum after Q4 results are announced,” said Sandeep Nayak, CEO of Centrum Broking.
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Earnings downgrades have continued after the December quarter and the prognosis is grim in the absence of a pick-up in private investment and the crisis in the banking industry. That this has been a purely liquidity-fuelled rally is evident from the rise in valuations. The Sensex is currently trading at 17 times estimated earnings for fiscal 2018, above its five-year average. Fundamental support is especially required for the stock rally since foreign money can turn tail quickly at the return of risk appetite or if the dollar strengthens.
Market projections make it all but certain that the US Fed will raise rates when its open market committee meets on 14-15 March. The Fed’s chair Janet Yellen had earlier said a rise in US interest rates could be “appropriate”.
She had also indicated that the Fed may raise rates more quickly than over the past two years.
“Post elections, the market will focus on bigger events lined up like Fed action on rates, monsoon, March quarter results and GST implementation. The markets have been putting behind bigger events quite faster, as was seen in Brexit and US elections,” said independent market analyst Ambareesh Baliga.