Markets and Delhi elections: What is the downside?

The markets continued their losing streak for a seventh consecutive session, with the benchmark indices, the S&P BSE Sensex and the CNX Nifty, ending down 1.7 per cent and 1.6 per cent, respectively, at 28,227 and 8,526 ahead of the outcome of the Delhi Assembly polls on Tuesday.

The weakness was triggered after the exit poll on Saturday predicted the Arvind Kejriwal-led Aam Aadmi Party (AAP) forming the next government in Delhi, not the Narendra Modi-led Bharatiya Janata Party. Most exit polls predict a majority for the AAP, with the most optimistic prediction by pollster Chanakya giving the AAP 48 (+/-) 6 seats in the 70-member House.

“Beside weak global cues, markets reacted negatively to the exit polls, as that would be the first election defeat of the party ruling in the Centre, post-Lok Sabha election. And, announcement of weaker-than-expected corporate earnings from infra major L&T, worsened the sentiment,” said Jayant Manglik, president,  retail distribution, at Religare Securities.

“Monday’s fall is partly a knee-jerk reaction to the exit polls. At the global level, the problems in the euro zone and Chinese weak trade data and expectation of a possible rate hike in the US continue to impact the overall market sentiment,” said Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

Outlook

With the markets drifting lower, can the poll outcome be a trigger for a meaningful correction ahead of the Union Budget and what should your market strategy be?

Analysts say the markets, after the reaction seen on Monday, could continue to slide over the next few days but rule out any major correction. On Tuesday, participants will be eyeing the actual outcome of the Delhi Assembly election and that would set the tone for the rest of the day. Broadly, as the Nifty has breached the crucial support zone of 8,600, analysts expect this corrective phase to extend further, with some intermediate rebound due to oversold positions.

The Nifty, according to Mathew of Geojit BNP Paribas, has immediate support at 8,450, also the 50-day moving average and psychological support at 8,400 levels. The 14-day relative strength index (RSI) is at 45.28 and the seven-day day RSI is at 28, indicating that market is nearing the oversold region.

“The market seems to be over-reacting to the exit poll predictions. The results will be known on Tuesday and this should end the event risk here. Corporate earnings have also been disappointing and that should not come as a surprise, as the outlook was only expected to improve after a lag. A pep-up in global markets will bring back some buying ahead of the Union Budget,” said Amar Ambani, head of research at IIFL, in a post-market note.

Sunil Jain, vice-president, equity research at Nirmal Bang, too, believes the market correction should be used as an opportunity to buy. Indoco Remidies, Finolex Industries, Muthoot Finance, Asian Paints and Alembic Pharma are among his top picks.

In terms of sectors, K Subramanyam, assistant vice-president (institutional research), Asit C Mehta Securities prefers infrastructure (Adani Ports), information technology and fast moving consumer goods sectors (ITC) at the current levels. However, he prefers staying away from the mid-and small-caps right now.