Will markets extrapolate state poll outcomes to general elections in 2024?

Markets are likely to see a short-term boost post the state election outcome that is likely to see Narendra Modi-led Bharatiya Janata Party (BJP) in Madhya Pradesh (MP), Rajasthan and Chhattisgarh emerge on top, said analysts. However, post this knee-jerk reaction, the focus, they believe, will shift to other factors such as geopolitics, oil prices and central bank policy action.

“There is a lot of time between now and the general elections in 2024. The markets may see a short-term boost now, but will soon start focusing on fundamentals. Flows into equity markets – both foreign and domestic – are important and will dictate the market direction. The state poll outcome has already been fairly discounted by the markets post the exit polls last week,” said U R Bhat, co-founder & director at Alphaniti Fintech.

Political pundits, meanwhile, saw these elections as the semi-finals to the upcoming Lok Sabha elections in 2024 that is likely to provide a glimpse into how the India’s Hindi-speaking heartland – a stronghold of the Bharatiya Janata Party (BJP) party (won 79 per cent or 177 out of total 225 seats in 10 Hindi speaking states in 2019) – perceives the BJP and its policies. These five states together contribute around 15 per cent of Lok Sabha and Rajya Sabha seats.

Meanwhile, last week, the S&P BSE Sensex gained 2.29 percent or 1,511 points to end at 67,481 levels, while the Nifty50 gained 473 points, or 2.39 per cent, to 20,267 levels. The S&P BSE Small-cap index, too, surged nearly 2 per cent. The all-round buying was on account of FII and DII flows, who cumulatively put in 14,950 crore into the Indian equity market, data show.

The state election results, according to Amnish Aggarwal, head of research at Prabhudas Lilladher, will dictate market momentum in the run up to Lok Sabha elections next year. Political uncertainty over the next few months, he believes, could keep foreign flows and, in turn, the market sentiment in check.

Also Read: Analysts suggest hedging India equity portfolio before state poll results

“India is on the verge of 'mother of all elections' after having a stable government for the past decade. India has witnessed strong FII inflows along with other emerging markets from April 2023. The country is also heading for state and general elections over next 6-8 months, which could increase political uncertainty and impact the FII inflows. We value Nifty at 15 per cent discount (17.3x) to 10-year average PE (20.4x) with September 2025 EPS of 1,302 and arrive at 12-month target of 22,584,” Aggarwal wrote in a recent note.

Word of caution

Our single most concern regarding the domestic equity market, said G Chokkalingam, managing director for research at Equinomics Research, is the valuation bubble in small and mid-cap (SMC) stocks where valuation in some cases is too steep.

Among the lot, Automotive Axles, Balmer Lawrie Investment, Bombay Burmah Trading Corporation, Expleo Solutions, Indoco Remedies, Jio Financial Services, KCP Ltd and NESCO are some of the stocks he remains bullish on.

“Unlike SMC stocks, the Sensex and Nifty are not in valuation bubble zone - the Nifty trades at 20.1x and 17.7x of FY24 and FY25 earnings, respectively, which is broadly in line with long-term average multiples. However, many SMC trade even at 40 to 80 PEs without any sound growth story,” he said.