Indian capital markets are expected to see a strong opening on Tuesday after the Bharatiya Janata Party (BJP) clinched a landslide victory in the politically crucial state of Uttar Pradesh.
The BJP won a record 325 seats in UP, the most any party has won since the 1991 elections when Kalyan Singh took the BJP to 221 seats.
But had the stock market discounted a good performance from the BJP in the run-up to the counting on March 11? Buying activity and the absence of hedges indicate investors expected the BJP to win in UP, but it is the extent of its win that will cheer investors. The Nifty is closer to the psychological 9,000 mark, just 2% away from its lifetime high of 9,119 levels, registered on March 4, 2015. In calendar year 2017, the Sensex and the Nifty are already up 9 per cent.
Corporate India have cheered the election results as the results suggest political stability, a crucial factor for foreign investment.
Investors value predictability & stability.BJP’s resounding victory in UP points to long term leadership. Markets may well applaud next week
— anand mahindra (@anandmahindra) March 11, 2017
Decisive mandate for BJP will embolden Modi govt to shift agenda from political to growth. Stock market will rock and Rupee strengthen.
— Harsh Goenka (@hvgoenka) March 11, 2017
So here are the 5 things to keep in mind as we enter a fresh trading week post the election results.
1) Investors will take heart from strong industrial output data that was published on Friday. The general index of industrial production for the month of January grew at 2.7% y-o-y, with all major subgroups such as mining, manufacturing and electricity sectors posting positive growth during the month.
2) Whether the rally will sustain throughout the week remains to be seen as the U.S. Federal Reserve will hold its two-day meet on March 14-15th, where it is expected to take a decision on raising rates. Higher rates will lead to a stronger dollar and India may see some foreign investors book profits as emerging market equities become more expensive.
Geopolitical stability in Europe and the impact of U.S. President Donald Trump’s “America First” business policies on Indian IT and pharma sectors will also be watched closely.
3) Foreign investors pumped in over Rs 10,000 crore in the Indian capital markets this month so far. This figure is encouraging as the net investment by foreign investors (equity and debt) in the month of February stood at Rs 15,862 cr. Between October 2016 to January 2017, foreign portfolio investors had pulled out a total of over Rs 80,000 crore.The trend reversed in the last two months is likely to get a further boost following BJP’s spectacular performance in the assembly elections.
4) A victory in UP is seen as a victory for Prime Minister Narendra Modi’s controversial noteban move last November which caused significant hardship for many citizens. Uttar Pradesh is India’s most populous state with over 200 million people and sends the most number of lawmakers to parliament. So while it may still be too early to judge the actual impact of demonetization, the fact that December quarter GDP growth stood at 7% coupled with the voters verdict in atleast 4 states out of the 5 that went to polls suggest that some of the fears may have been overstated. A pick up in corporate earnings will confirm if the actual impact of demonetisation is limited or not.
5) So what does this all mean for the reforms process under the Narendra Modi government? With the BJP’s influence moving pan-India, investors are now hoping the Modi government to use this period of political stability to push for bold reforms, especially in infrastructure. The implementation of the crucial Goods and Services Tax (GST) from July 1 is the next big structural reform that is likely to boost the tax base and government revenues.
It is important to note that the Modi government may bring in more unconventional reforms like demonetisation. That may not necessarily be good for the stock markets in the short term hence market experts are advising investors to exercise restraint and not be carried off by the initial euphoria that maybe witnessed on Tuesday.