Assembly election outcome key for market direction

In the immediate term, they will sway to the Budget proposals with sector and stock specific action

At a time when most participants have their eyes glued to the upcoming Budget proposals for an insight into the road ahead for the markets, the market direction over the next few months, however, may actually be decided by the outcome of the Assembly polls in Punjab, Uttar Pradesh (UP), Goa, Uttarakhand and Manipur that begin on February 04.

Incidentally, both the key events - the Union Budget and the assembly elections - come in the backdrop of demonetisation. The outcome, to be announced on March 11, could create distractions (or positives) for the government it will be interpreted as a referendum on the demonetisation drive, analysts say.

"The outcome will boost NDA's strength in the Rajya Sabha moving forward, if their electoral harvest is good. It will also have a bearing on Presidential elections later this year. The election in UP (biggest state by population), dubbed as the semi - finals to the 2019 general elections, appears to be heading towards a close fight," points out Ravi Sundar Muthukrishnan, senior vice president and co-head for Research at ICICI Securities in a recent co-authored report.

Calendar year 2016 (CY16) brought something to cheer for the Modi government given the victory in assembly elections in Assam. The Bharatiya Janata Party (BJP) astutely projected immigration as a central issue is Assam gained ground, experts say. Although the National Democratic Alliance (NDA) did not make any meaningful inroads in West Bengal, Kerala and Tamil Nadu, the performance in these states, experts say, does not call for any profound analysis, considering the historically low presence of BJP in these states.

"Forthcoming five state elections this year are crucial, as the populace will judge the recent economic and political developments. Impact of demonetisation will be a key narrative (besides other local issues). These ballots will also serve as an implied referendum on Narendra Modi's development agenda. Indisputably, outcome of the elections in the most populous state of Uttar Pradesh (UP) will pave the path for 2019 elections," points out Amar Ambani, head of research at IIFL.

Outlook

Given this backdrop, analysts expect the markets to remain range-bound / choppy till the outcome of the assembly election is known in March-mid. In the immediate term, however, they will sway to the Budget proposals with sector and stock specific movements.

"If the government unveils populist measures with an eye on the assembly elections, the markets will react sharply and can slip 5 - 10 per cent from the current levels over the next few months," feels G. Chokkalingam, founder & managing director of Equinomics Research & Advisory.

A deviation from the fiscal consolidation path would be a near-term in the budget will also be a negative for the rupee - add to this under-priced demonetisation impact and higher oil prices.

"Our Nifty50 target for end-2017 is 8,800, with upside/downside scenarios of 9,700/6,400 levels," says Gautam Chhaochharia, executive director and head of India research at UBS Securities.

Vikas Khemani, president and chief executive officer, Edelweiss Securities, too, rules out a runaway rally from hereon given the up move seen since the beginning of CY17.

"The markets have done well in January, partly in expectation of the Budget and partly due to the effects of demonetisation fading away. Given that there are still uncertainties and headwinds at the global level, the markets are likely to remain range-bound and consolidate rather than seeing a runaway rally from the current levels. The Nifty50 index could remain in a range of 8,200 - 8,800 levels over the next few months," Khemani says.