Modi's UP win sets stage for return of the bulls, Nifty likely to touch all-time high

But markets could face headwinds in sustaining gains

The stunning victory of the Bharatiya Janata Party (BJP), under the leadership of Prime Minister Narendra Modi, in the Uttar Pradesh (UP) — the most populous state, key for central politics — Assembly elections is likely to be cheered by the markets, when these resume trading on Tuesday.

Players expect the benchmark indices to rally more than two per cent on Tuesday, as the strong showing in state elections is expected to spur the Modi government at the Centre in expediting reform and boost infrastructure spending.

The huge mandate in UP and neighbouring Uttarakhand will boost the sentiment of foreign and domestic investors, who read this as a sign of political stability beyond 2019, when there will be fresh Lok Sabha elections.

“The markets will salute the verdict and go up by two to three per cent. The Street had factored in a BJP win but not such a large mandate. This will act as a big push for the next round of development and reforms,” said Motilal Oswal, chairman, Motilal Oswal Financial Services.

On Monday, the Nifty futures contract traded on the Singapore Stock Exchange gained 2.5 per cent to 9,196, suggesting the index will touch a new record high when they open on Tuesday.

 “The markets will rejoice, as nobody expected this kind of victory. It will help the BJP strengthen its tally in the Rajya Sabha, where they have been facing hurdles in passing some Bills. We expect the government to announce the next round of reforms and boost infrastructure spending,” said Dharmesh Mehta, managing director, Axis Capital.

Market players expect the goods and services tax (GST) to roll out soon. They believe the government could take steps to boost road and rail infrastructure, contain bad loans at banks and push for reforms in power and agriculture. 

On Friday, the Nifty closed at 8,935, while the 30-share Sensex on the BSE ended at 28,946. 

The Nifty index is less than one per cent away from its all-time closing high of 8,996 on March 3, 2015. 

The Sensex is currently 3.5 per cent below its record closing of 29,844 on January 30, 2015.

However, it remains to be seen if the markets would sustain above this level. There are headwinds such as the likely imminent interest rate increase by the US Federal Reserve on Wednesday, uncertainty over US President Donald Trump’s policies, elections in key European nations and risks of flaring of tension due to a missile test by North Korea.  

Back home, a lack of sustained pick-up in corporate earnings has raised doubts of sustainability on the sharp 12 per cent rally in the markets from their December 2016 low. So far this year, the benchmark indices have rallied around nine per cent, supported by strong domestic and foreign flows.

These gains, without lack of material change in earnings growth, have resulted in the Sensex and Nifty trading above their long-term averages, at around 19 times their one-year forward earnings estimate. “The reform process had taken a backseat due to elections. Now, the markets will wait for positive announcements for the next big move. Globally, commodity prices are failing, which will help corporate earnings,” said Mehta.