Mumbai: Stock markets are expected to rally if exit polls predicting victory for the Bharatiya Janata Party (BJP) in Himachal Pradesh and Gujarat elections turn out to be accurate. Most exit polls have suggested a clear victory for the Prime Minister Narendra Modi-led party in both assembly elections, results of which will be declared on Monday.
“If BJP wins in Gujarat, as exit polls predict, it will be an endorsement of the government’s policy reforms like demonetisation and goods and services tax (GST). The markets uptrend will continue, further boosted by positive sentiment," said Amar Ambani, partner and head of research, IIFL Investment Managers. Ambani expects the benchmark Nifty 50 touching 10,800 points by end of December and has set a target of 13,000 points in 2018.
Markets have touched record highs multiple times this year on a spate of liquidity, especially after the BJP won the Uttar Pradesh elections in March. Benchmark indices have gained around 26%, outperforming the MSCI World index’s 12% gain so far this year. Foreign institutional investors (FII) have pumped in $8.3 billion in Indian equities so far in 2017 but have sold $369.3 million in December, amid elevated valuations and disappointing earnings growth. Despite lack of support from fundamentals, domestic institutional investors (DII) have also invested Rs86,138.34 crore in Indian shares this year so far; Rs3,956.13 crore worth Indian equities were bought in December.
V.K. Sharma, head, Private Client Group (PCG) and Capital Market Strategy, HDFC Securities Ltd said, “Gujarat elections outcome is significant as it will be a litmus test of public opinion ahead of the 2019 elections. The FIIs will see it as a continuation of the reforms and will allocate more to India." He said that if BJP manages to get a two-third majority in Gujarat, the Nifty will race to 10,800 while 150 seats or thereabouts could see the 11,000-mark coming up in this month itself.
However, an unfavourable outcome may take the shine off Indian markets. In a note on 14 December, Sonal Verma, managing director and chief India economist, Nomura Holdings Inc., wrote, “We would caution that the track record of exit polls in predicting the final results has been mixed. For the five state elections held in March 2017, a simple average of exit poll results got the eventual election outcome correct for only two of the five states."
According to Sharma, if the BJP does not get a majority, the markets will tumble. “The Nifty could easily surrender 400 points in the short term and get under a pall of gloom for the medium term, waiting for the BJP to prove that it can wrest back the advantage."
Most analysts feel that markets’ focus will shift to macro, earnings and valuations post elections, particularly if BJP does not perform as expected.
“The markets’ focus will increasingly shift to macro and earnings. India’s macro has weakened significantly in the past few months. The equity market seems to be much more sanguine about India’s macro than the bond market. We note that India will have to likely contend with a weaker macro in calendar year 2018/FY2019 versus CY2017/FY2018 given likely higher inflation, interest rates and possibly higher current account deficit and weaker currency," said Kotak Institutional Equities in a 15 December note.
Earnings downgrades have continued as companies suffered after demonetization and changes in taxation regime due to implementation of GST on 1 July. Support from fundamentals is especially required for a stock rally, while foreign money stands at the risk of leaving as the US Federal Reserve stays on track to tighten monetary policy in the year ahead. Data from Bloomberg 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%.