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Brokerages believe that the Bharatiya Janata Party’s (BJP’s) stronger-than-expected showing in state elections reduces political risks for the domestic markets going into 2024.
However, after the short-term excitement, the focus will soon shift to earnings, global liquidity conditions, and the interest rate trajectory.
“BJP’s win in the three state elections is much better than what exit polls suggested and reinforces the consensus expectations of a Modi win in the 2024 national elections with a greater likelihood of 300+ seats for the BJP.
"This boost to investor sentiment should augur well for domestic cyclical sectors viz., banking, industrial, power, property, and midcap,” said a note by Jefferies.
The National Stock Exchange Nifty Bank Index on Monday soared 3.6 per cent, Nifty Oil & Gas rose 3.2 per cent, and Nifty Realty gained 2 per cent.
Nifty IT and Healthcare underperformed with gains of 0.2 per cent and 0.3 per cent, respectively.
“Equity markets were justifiably anxious about the outcome of state polls and what it portends for the 2024 general elections.
"With the outcome overwhelmingly in favour of the incumbent BJP, the confidence of the market in the current dispensation and political continuity after 2024 Lok Sabha elections will get a boost.
"This augurs well for macroeconomic and policy momentum for India, which, at the moment, is seeing the highest growth among major economies (both gross domestic product as well as corporate earnings),” said a note by Motilal Oswal.
The Congress, BJP’s main opposition, was expected to give a tough fight in all four state elections.
Still, it managed to win only in the southern state of Telangana and was trounced in the northern states.
“A Congress sweep of the state elections would have led markets to reassess their probability of the BJP returning to power in the 2024 general elections with a strong majority.
"It would have strengthened Congress’ leadership position within the fractious anti-BJP Opposition alliance, INDIA Instead, the Congress’ poor performance is likely to make for more differences within the Opposition camp,” said a note by Nomura.
INDIA — an Opposition alliance led by the Congress — plans to jointly fight the BJP in the general elections in May 2024.
PhillipCapital, in a note, said foreign portfolio investor (FPI) flows into India will get a boost as political risks reduce.
“These will result in the retention of robust earnings.
"Domestic flows and investment in equities have been quite substantial in the last few years.
"This trend is likely to continue. These developments, along with the peaking of interest rates globally, bode well for FPI flows,” it said.
FPI flows this year have ebbed and flowed.
After a strong selloff in September and October, overseas flows have steadied in recent weeks amid a drop in US bond yields and an improvement in global investors’ risk appetite.
“These election results are certainly a cut above market expectations. And markets, to that extent, shall cheer the outcome in the near term.
"That said, eventually, fundamentals — earnings, liquidity, and interest rates — shall have an upper hand in shaping the market outlook over the medium term,” said a note by Nuvama Institutional Equities.
After the latest gain, the Nifty is up nearly 14 per cent on a year-to-date basis.
Meanwhile, the Nifty Midcap 100 and the Nifty Smallcap 100 are up nearly 40 per cent and 50 per cent, respectively.
The Nifty currently trades at 25 times its 2022-23 earnings.
Analysts expect Nifty earnings to grow about 20 per cent in 2023-24 (FY24).
On FY24 estimated earnings, the Nifty still trades at a lofty 21 times.
“We expect election-linked market volatility to remain low, which may result in the market trading at rich valuations in the near term," said a note by Kotak Institutional Equities.
“Megacaps have underperformed other largecaps, midcaps, and smallcaps.
"Megacaps may now see more interest from the market (specifically foreign investors) given their reasonable valuations and lower worries about a suboptimal outcome (no decisive mandate) in the general elections,” the note added.
