After a 3,000-point, or 12 per cent, rally in the S&P BSE Sensex from its December lows, the market is headed for a period of volatility, as it gears up for the outcome of the ongoing Assembly polls. The outcome of the polls in Punjab, Uttar Pradesh (UP), Goa, Uttarakhand and Manipur — to be announced on March 11 — could create distractions or positives for the government and will be interpreted as a referendum on its note ban drive, experts say.
Experts say the markets will remain range-bound but choppy till the outcome of the Assembly elections is known. While most of them rule out a runaway rally in case of a favourable outcome, negative news can see the markets correct 8-10 per cent over time, they say.
“A phenomenal majority could be sentimental triggers that can push the markets to all-time highs; though I feel most of the positives are already priced in,” says U R Bhat, managing director, Dalton Capital Advisors.
Some analysts have raised a concern that markets are becoming expensive at current valuations. The Sensex is trading at a price-earnings multiple of nearly 22 times, which is high compared with 23 times underlying earnings reached in July last year, which was a five-year high.
“With no material change in earnings estimates and no visible evidence suggesting the risk of consensus earnings downgrades – seen over the past three consecutive years - is now firmly behind us, the liquidity-driven expansion in valuations looks unlikely to sustain,” wrote Abhay Laijawala, head of India research at Deutsche Bank Group in a recent report.
“Given that the markets are overvalued, negative news can trigger a reaction and the Nifty50 index could correct 150–200 points when the markets open after the election outcome (on Monday 14), and can fall 8–10 per cent over time,” Bhat added.
Nischal Maheshwari, head of institutional equities at Edelweiss Securities, however, says, “The markets are reacting more to global events than domestic developments. Though an unfavourable verdict can trigger a knee-jerk reaction in the markets, I don’t see a sharp correction here on,” he adds.
The market, represented by the Nifty, could swing 150-300 points (two to four per cent) in either direction, depending on the outcome of the UP elections. Maheshwari doesn’t rule out a 200-300 point rally in the Nifty in case of a favourable outcome for BJP.
Beyond markets, some experts say that an adverse outcome in UP could possibly also reflect on the government’s reforms agenda.
“An unfavourable result, on the other hand, could ignite concerns about the feasibility of further reforms and of the path of fiscal consolidation that the government has adopted,” points out Manishi Raychaudhuri, Asia Pacific equity strategist at BNP Paribas.
The election outcome in UP, the most populous state in the country, is being dubbed as the semi-final to the 2019 general elections, and appears to be heading towards a close fight.
Experts say that the outcome of these Assembly polls has the potential to boost the Narendra Modi-led National Democratic Alliance’s (NDA) strength in the Rajya Sabha, if their electoral harvest is good. That apart, it could have a bearing on the presidential elections later this year.
“As far as the policy-making at the Centre is concerned, what the markets will eye is how many Rajya Sabha Members of Parliament NDA will have (after the UP state elections),” says Bhat.
“UP is seen as the litmus test of Prime Minister Modi’s performance. Irrespective of the outcome, we expect government policies to stay prudent. A better performance for the Bharatiya Janata Party (BJP) in the elections would improve its seat tally in the Upper House, although it is likely to remain below the halfway mark throughout its term (until May 2019),” says Sonal Varma, managing director and chief India economist at Nomura.
Calendar year 2016 (CY16) brought something to cheer for the Modi government, given the victory in the Assembly elections in Assam even though the NDA did not make any 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 the BJP in these states.
“The impact of demonetisation will be a key narrative (besides other local issues). These ballots will also serve as an implied referendum on Modi’s development agenda. Indisputably, the outcome of the elections in UP will pave the path for the 2019 elections,” points out Amar Ambani, head of research, IIFL.
A recent surprise came from the municipal elections in Maharashtra, where the BJP did surprisingly well.