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Uncertainty still seems to cloud the capital market despite the BSE Sensex gaining 249 points on Thursday after the exit polls predicted victory for BJP in the Assembly elections held in four States.
The outcome of the exit poll was more or less on expected lines of foreign institutional investors, who foresee a decisive mandate for the BJP in the general elections to be held in May next year.
Inheriting weakness
Fundamentally, however, nothing much would have changed with the new government inheriting a weak economy and a burgeoning fuel bill, said market participants. They added that it would also be interesting to see whether the new government would continue with the economic reforms initiated by the previous government.
Jayant Manglik, President (Retail Distribution), Religare Securities, said the surge in benchmarks indicate celebration by market participants on the outcome of the exit polls following the State elections. Confirmation of a strong showing by the Opposition party would bolster the chances of victory in the general elections due by May, he said.
“Amid election mood, markets are also closely observing the indication from the US markets over tapering. So, uncertainty is here to stay, and the best way to deal with it is to follow the trend rather than trying to predict the market tops and bottoms,” he said.
Needs clear majority
Deven Choksey, Managing Director, KR Choksey Shares and Securities, said while the markets are bullish on expectations that the BJP would win in the general elections too, it should do so with a clear majority.
“A hung verdict in the Union elections leading to a coalition government may upset the apple cart, with each party pulling reforms in different directions,” he added.
On the possibility of the BJP continuing reforms initiated by the Congress, Choksey said all the BJP-ruled States have performed well on the economic front and the party would surely kick-start all the stalled projects, attracting foreign investments.
Prashant Pande, Research Analyst at Nomura, said a sustained improvement in economic fundamentals would take time to change and the economy still faces obstacles.
Fiscal deficit
Even as exports are positive, domestic demand remains very weak.
There are no immediate catalysts to reverse this. Consumption has been sluggish due to high inflation and a weak job market, while political uncertainty, weak demand and increased leverage on corporate balance sheets is preventing any meaningful increase in the capex cycle, he added.
The Government’s fiscal deficit over the first seven months is already at 84 per cent of its full-year target; so austerity measures to meet the budgeted fiscal deficit target are even more likely to hurt growth, said Pande.
Jyotivardhan Jaipuria and Anand Kumar, analysts at Bank of America-Merrill Lynch, said, irrespective of these election results, markets tend to do well in the run-up to elections.
In six of the seven previous elections, investors buying six months before elections and selling on the day before results would have seen positive returns. The average return has been 15 per cent.
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