Mumbai: Indian stocks rallied on Monday on hopes that the ruling Bharatiya Janata Party (BJP) will pursue its reforms agenda after winning assembly elections in Gujarat and Himachal Pradesh. In a wild swing, the benchmark Sensex recovered nearly 1,200 points after losing over 850 points in the morning when early trends showed the BJP was neck-and-neck with the Congress party in Gujarat, the home state of Prime Minister Narendra Modi and BJP president Amit Shah.
The Sensex closed at 33,601.68, up 138.71 points, or 0.41%. The Nifty closed at 10,388.75, up 55.50 points, or 0.54%. Global markets were supportive with a few Asian indices gaining almost 1% on hopes the US will pass a bill that will reduce corporate as well as individual tax rates and boost growth.
“With a positive outcome for the BJP in both Gujarat and Himachal, it appears that the bold measures such as demonetization and goods and services tax (GST) have not significantly affected the sentiment adversely for the BJP. This would provide the central government the confidence to continue with its policy focus. However, the upcoming Union Budget being the last one before the 2019 general election, it is possible that the government could go a bit more liberal on the spending front, especially with respect to the rural economy," said Unmesh Kulkarni, a managing director at Julius Baer Wealth Advisors (India) Pvt. Ltd.
By close of trading, the BJP had a clear majority in both Himachal Pradesh and Gujarat, although the projections of around 100 seats in the latter seat were short of the party’s expectation of 150 seats.
“The result is also a big boost for foreign direct investment, which is sticky money. The markets trajectory is likely to be northwards now. We see the Nifty touching 11,500 in medium-term," said Ajay Bodke, chief executive and chief portfolio manager, Prabhudas Lilladher Pvt. Ltd. Others were more skeptical.
“I feel nothing much changes on the ground level as far as economy is concerned," said Ritesh Jain, chief investment officer, BNP Paribas Mutual Fund. “I don’t think they (the government) have space to spend money, in terms of fiscal situation and gain. At the same, they need to soothe sentiment going into 2019 elections."
According to analysts, the markets will now shift focus back to fundamentals—the economy, corporate earnings and reforms. Indian benchmark indices have rallied 26-27% this year and investors are increasingly worried about expensive valuations. Currently, the Nifty is trading at 18 times its expected earnings for the current fiscal.
“The markets may be a bit cautious ahead of the budget in February. Led by metals, a few corporate banks and select consumer discretionary companies, corporate earnings are likely to see a revival. By FY19, we see 16-18% earnings growth," said Sunil Singhania, global head of equities at Reliance Capital Ltd.
For now, earnings estimates continues to be downgraded. Bloomberg data shows Nifty companies’ consensus earnings per share forecast for the current fiscal has fallen 8.3% since April; for fiscal 2018-19, it has been cut by 2.6%. Despite elusive earnings growth, liquidity has been intact. In the year so far, foreign institutional investors have bought Indian stocks worth $ 8.33 billion although they have sold $526.32 million in December. Domestic institutional investors (DII) have pumped in Rs86,773.78 in 2017.