Will these state elections impact markets at all?

The Nifty has been perched slightly below the psychological 9000 mark. Obviously, the Nifty appeared to be waiting for the actual results. In fact, even the exit polls failed to impress the markets as they awaited the actual results. With the BJP gaining a thumping win in Punjab, what exactly could be the outcome in markets?

Crossing Mount 9000… 

It was never a question of whether but when. The markets were expected to be impressed if the ruling BJP put up a decent performance in the UP elections. What actually transpired was beyond most people’s imaginations. The sweeping victory of the BJP should have larger implications for the ability of the government to push through bills. Its likely improvement in the Rajya Sabha in 2018 will give the BJP a lot of leverage. The level of 9000 should be crossed by the Nifty in the month of March as the big event risk is out of the way for the equity markets.

Focus will shift to Fed action… 

The focus of the markets will now shift to the Fed rate action. A 25 bps rate cut is already factored into the price. Markets will be looking at the trajectory and pace of rate hikes. If liquidity still remains accommodative in the US and rate hikes are calibrated, the Nifty should have reason to celebrate. That will be the next big focus after elections.

FPIs could turn positive…

The BJP victory should be positive for the sentiments of the FPIs in India. Foreign investors have always been wary of dislocations created by state level factors. The UP results are eloquent testimony of the fact that the people are broadly in sync with the government’s economic policies. This is truer of egalitarian economic policies like rural spending, rural income generation, demonetization etc. But more importantly, the FPIs could take a hint from the boost to the reforms process. There was always the lurking fear that state-level defeats may thwart the reforms process. That does not seem to be a worry for FPIs any longer and that will add to their conviction.

Eventually, about fundamentals…

Here is a caveat! The markets will eventually gravitate towards their fundamentals. While these positive sentiments may drive the Nifty above the 9000 mark, the investors will still ask fundamental questions pertaining to growth, earnings, P/E ratio, business environment, turnaround in the capital cycle etc. These are the fundamental factors that will eventually drive the market. For the short term, this victory will bridge the gap between the optimists and the skeptics. But the real challenge still remains that the quarterly numbers need to start impressing. That is the million dollar question! ©

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