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State Elections Outcome– Journey to continue!!

Mar 09, 2017(15:01)
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Indian markets have been in a sweet bull run since December 2016 and is leading in terms of gains in Asia this year. On the other hand, the rupee has also recouped majority of its losses since Donald Trumps US election win as FIIs have already pumped billions into the countrys bonds and equities. As investors wait for the results of one of Narendra Modis biggest electoral tests since he came to power in 2014, there are a lot more other things that will decide the upcoming structure of the Indian equities.

Markets have spent the current week on tenterhooks as the outcome of state elections will not be known by the market participants as shutters will be down before March 11, the day on which results are to be declared. On the overall front, we are not so concerned with the ongoing buzz over the importance of Uttar Pradesh election outcome as Indias economic fundamentals will guide foreign investors and the state election wont have a meaningful impact for the longer term. If we go by the historical demonetization decision, the fiscal restraint shown in the budget proposals and the ongoing progress on the GST, it appears the government has given least importance to the electoral outcome and will continue to focus on development agenda. 

By opening up India to more foreign investment, tackling corruption and seeking to introduce a goods and services tax, Modi government has spurred economic growth to more than 7 percent and made India a favorite with overseas funds. Going back, Indias economic growth, which was 5.8 percent in the first quarter of 2014 before Modi took office, peaked at 7.9 percent in the first three months of last year. It expanded 7 percent last quarter, beating the 6.1 percent analysts had forecast, despite demonetization of the high currency denomination currency notes.

Unless BJP suffers a significant upset in the state elections, any adverse outcome will not lead to any big fall in the Indian markets. Even if BJP loses the polls, this will in turn accelerate the reforms agenda and will suppress the central government to work more efficiently to win the hearts of the citizens which may be positive for the Indian markets.  Apart from domestic factors, global markets rally have been very strong and Indian markets have underperformed significantly with respect to its global counterparts. The liquidity in the overall global markets on hopes of growth recovery coupled by domestic money inflow in India through mutual funds route may continue the positive journey for the equities post election outcome. 

From a market participant perspective, we dont expect state elections to immensely impact the markets despite all the noise and commentary we get because state elections do not alter the central governments policy trajectory. However in the near term, a immediate reaction on the either side may be seen if there are extreme results outcome i.e., if BJP wins UP very well or strongly or loses very badly then you could see impact on markets.  Any disappointment however can cause significant volatility and disruption in the positive momentum and can have a short term negative impact on the markets. We expect the market to regain the positive terrain and will start focusing on the other important factors like the quarterly earnings, currency movement, and the global markets trend. Also, the implementation of GST which is more likely to be done by July 01 2017, may lead to mild postponement of speedy growth as it may take time for the new system to generate the real fruits for the economy in the longer term. But the growth story of India may remain intact and may continue to be the favorite investment destination for the foreign institutional investors. Therefore, we expect market to continue its bullish move and declines amid election outcome which in turn may provide a buying opportunity for the long term investors who have not participated in the recent market rally.  


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