Poll outcome: Impact for markets

With the Congress having won just one of the five state elections, the market was clearly nervous. In the crucial state of Uttar Pradesh (UP) where the Samajwadi Party (SP) has won a clear majority, the Congress clearly has no role in government formation. This is something the market had hoped for, believing it would provide much-needed trigger for strong policy action at the Centre. An extract below from two known research houses on what the outcomes mean for the market.

MORGAN STANLEY RESEARCH
Ridham Desai, Sheela Rathi, Utkarsh Khandelwal & Amruta Pabalkar Policy reform — Glass half full or half empty?: The immediate consensus reaction is that these results will trigger a wave of populism from the Congress government at the Centre. Perhaps a hasty conclusion, given the country's fiscal balance and that general elections are still 24 months away. In fact, we think these results could trigger a concerted effort to consolidate the fiscal deficit and raise growth through development, so that social spending becomes more viable in 2013, ahead of the 2014 general elections.

Market view: In the near term, the market is likely to be range-bound as it faces another couple of key events in the form of the Budget and the monetary policy. We think the Nifty may be coming to the end of its correction that started at around 5,600, save for adverse global events. Earnings revisions seem to have troughed, absolute valuations seem fine and the market's sentiment is not to discount a good outcome but to anticipate a bad one. We remain focused on stock picking as a strategy.

CITI INVESTMENT RESEARCH & ANALYSIS
Aditya Narain, Rohini Malkani & Anushka Shah

Negative surprise for markets: Market expectations have been belied. The hopes of the Congress being a critical ally of the SP at the state level and consequent reciprocal support at the Centre are now unlikely. The market was expecting a stronger Congress show, translating into increased flexibility in economic decision-making.

If Cong goes defensive: Raises the risks to the current rally, as expected reforms may stall, the macro could strain and capex may slow. In effect, economic revival gains that the market has started factoring in could be challenged. If so, sectors most impacted would be financials, capital goods and other investment/rate cyclicals, and defensives will be back to dominating.