Markets to look at state elections for direction

The outcome of the upcoming state assembly election is likely to set the tone for the equity markets in the near term. Currently, the BJP is in power in all three states ( Rajasthan, MP and Chhattisgarh). Experts believe that an outright victory for the saffron party would definitely be a big boost for the markets in the near term as it would help the ruling party at the centre build momentum in its favour running into next year’s Lok Sabha elections.

“While the dynamics of state and national elections are different, we believe a two- thirds win for the BJP will be tailwind for the market and a one- third will be a little negative and raise concerns, while a loss in all the three states will significantly lower expectations of the general elections – and likely market levels. This could direct the markets expectations into the elections,” said Edelweiss Financial Services.

Any volatility and corrections on account of the poll outcome according to it would be a good opportunity to build long term portfolio. The markets are factoring in a second term for the BJP- led NDA at the centre though with a slender margin.

“India is being interrupted by global macro shenanigans, a credit scare and an impending election. That, through the elections next year, should keep the market volatile and valued around means, and is likely to provide more opportunities than returns,” Edelweiss Financial Services said.

According to it, the markets are likely to hover around its mean valuations till the elections and, hence, it believes that running a relatively defensive portfolio ( large cap stocks in sectors such as banks, consumer staples, IT, and pharmaceuticals) would be ideal while keeping an eye out for opportunities that expectations swings might throw up.

“We believe the time to reap these gains will be beyond— when the interrupted ( but not disrupted) business cycle comes back to the fore, there’s a little more risk appetite in the economy and valuations become a little more generous,” it added.