Markets discounting BJP victory in Gujarat polls
As Gujarat gears up for a poll battle, analysts believe political considerations are likely to play a more dominant role in driving economic decisions. The markets at current levels, though are pricing in a Bharatiya Janata Party victory to some extent, are likely to trade sideways till the final outcome is known. PUNEET WADHWA writes
As Gujarat gears up for a poll battle, analysts believe political considerations are likely to play a more dominant role in driving economic decisions. The markets at current levels, though pricing in a Bharatiya Janata Party (BJP) victory to some extent, are likely to trade sideways till the final outcome is known.
Between now and the general election (likely in May 2019), there are 12 Assembly polls which, analysts say, in a way will be interpreted as a referendum on the Narendra Modi-led government’s two key decisions — demonetisation drive and implementation of the goods and services tax.
Of the states, the focus will be on Gujarat (December 2017), Karnataka (April 2018), Madhya Pradesh (December 2018) and Rajasthan (December 2018). Reports suggest the Election Commission could align the 2019 general elections with the Assembly polls of some states scheduled between end of 2018 and mid-2019.
“Once the results of this election are out, anticipation for the outcome of the 2019 Lok Sabha poll would be quite near. Second, Gujarat being the home state of PM Modi, his popularity there would be taken as a significant sample for his popularity at an all-India level,” said G Chokkalingam, founder and managing director, Equinomics Research.
Over the past month, the government had announced several policy measures, including an interest-free agriculture loan and formation of new Gujarat Industrial Development Corporation units. Two major ones —a ~2.11-lakh-crore recapitalisation package for PSU banks and the infrastructure push via the Bharatmala Project — caught the market’s attention.
“The big-ticket reforms are behind us and we expect incremental reforms to focus on execution of already announced measures — the banking sector, strategic stake sales, infrastructure spending and privatisation. We expect a pause on fiscal consolidation in FY18. We do not expect the government to throw caution to the wind, but expect some shades of populism to emerge over the next year,” said Sonal Varma, managing director and chief India economist at Nomura.
So, how will the markets interpret the outcome and what should be your investing strategy? Though most analysts expect the BJP to emerge victorious in Gujarat, a loss, they said, could impact the market’s sentiment, as political stability and the present government’s thrust on economic reforms are the basis for anticipation of a long-term bull-run.
So far in 2017, the S&P BSE Sensex and the Nifty50 indices have rallied around 24 per cent and 26 per cent, respectively. The mid- and small-cap indices on the BSE have outrun their large-cap peers, with a gain of nearly 35 per cent and 42 per cent, respectively, in this period.
“I think the rally will now take a breather till the election outcome is known. The Gujarat outcome will be taken as a sample of Modi’s popularity at the all-India level. A victory is essential to give confidence to the markets. I don’t think the foreign institutional investors will be too keen to invest in India till clarity emerges. Given the recent rally, investors can book profits partially,” Chokkalingam said.
Mutual funds that have invested ~95,000 crore into the equity segment, though, are likely to continue pouring in money. This, in turn, will keep the downside protected in case of any adverse domestic or global event, analysts said.
“The markets are discounting a Modi/BJP win in Gujarat. Domestic institutions have been investing at a time there have been FII outflows. Unless there is a significant negative that compels investors to take a hard look at India, flows — both domestic and foreign — will keep the markets buoyant,” said Tirthankar Patnaik, India strategist at Mizuho Bank.