Markets are not factoring in Karnataka poll outcome yet, say analysts

Markets have not yet priced in the possibility of a loss for the Narendra Modi-led Bharatiya Janata Party (BJP) in the upcoming assembly election in Karnataka. Though analysts expect a knee-jerk reaction to the outcome on May 15, they believe the markets will start focussing on other global and domestic events soon after.

Nilesh Shah, managing director at Kotak Mahindra Mutual Fund believes the S&P BSE Sensex could dip sharply if the BJP loses Karnataka. He, however, expects the recovery to be equally swift. A win, on the other hand, could take markets higher.

“Markets are not factoring in a loss for the Bharatiya Janata Party (BJP) in Karnataka yet. On the contrary, there are reports that suggest that the BJP will win – and probably that’s why the S&P BSE Sensex was able to cross the 35,000 mark in April. That said, stability should return after a knee-jerk reaction, as the markets will look at events beyond the Karnataka election outcome,” he says.

And data since 2014 does support this argument. An analysis of market returns, as represented by the benchmark indices – the S&P BSE Sensex and Nifty50 – suggests in all cases (except Bihar assembly election outcome), the markets have given a positive return in one month from the day the election outcome was known.

“The election outcome was on predicted lines and hence there was no reason for the markets to panic. Once the outcome was known, markets started to focus on the other domestic and global cues for direction,” explains G Chokkalingam, founder and managing director at Equinomics Research.

Karnataka election is being dubbed as the semi–final to the 2019 general elections and appears to be heading towards a close fight, reports suggest. Besides beefing up the tally in Lok Sabha (Karnataka has 28 seats) and Rajya Sabha (12 seats), this election is important for the BJP to make in-roads into south India – a region that has proved difficult for it to foray into. The state is significant for the Congress as well, which has been facing a tough fight with BJP in most of the states it used to rule.

“The markets are not discounting a defeat for the NDA yet. What they do believe that it will be a close fight between the Janata Dal (Secular), or JDS, Congress and the BJP. In case the Congress bags Karnataka on its own, it will be a dampener for the markets. In that case the Nifty50 can correct to 10,300 levels,” says U R Bhat, managing director, Dalton Capital Advisors.

The S&P BSE Sensex has rallied seven per cent, or nearly 2,200 points in April – the best monthly gain since March 2016 that put the S&P BSE Sensex among the top performers globally.

Rajat Rajgarhia, chief executive officer (institutional equities) at Motilal Oswal, too, expects the immediate reaction to be positive in case BJP was to bag the state. “Markets move on from election outcomes very quickly. Factors such as earnings, economic growth, interest rates etc. have a more direct impact on them. Karnataka election outcome impact, too, will be short-lived,” he says.

Chokkalingam expects the markets to rally around five per cent from here on in case the BJP is able to form the government in Karnataka. “The positive sentiment can take the Nifty50 past the 11,000 mark over a few sessions,” he says.