Indian equities may be poised for further gains following a strong mandate for the ruling party at the Centre in three out of the five State poll results.

Political stability augurs well for reforms and could boost investor confidence. “The outcome of State elections hints at continued uprun in markets,” said Dhiraj Relli, MD & CEO, HDFC Securities. “While part of the outcome was discounted in advance, there is scope for a further up move discounting the positive surprises coming out from the results.”

Political continuity could augur well for capex and housing upcycle over the current decade driving higher GDP growth and attractive market returns, according to Jefferies. The brokerage’s global strategist Chris Wood in October had reportedly cautioned that the Indian equity market could correct as much as 25 per cent if the ruling Bharatiya Janata Party loses the general election next year.

“A stable political environment could drive the markets higher, with the possibility of the benchmark Nifty attaining 20,500-20,800 levels. Optimistic global trends including the return of foreign investors are factors that will drive the upward movement,” said Prashanth Tapse, Senior VP (Research), Mehta Equities.

All-time high

On Friday, the 50-share Nifty rose for the fourth straight session and hit a fresh all-time high of 20,291, on the back of better-than-expected GDP data and strong global cues.

Foreign portfolio investors have reversed their selling strategy in India in the past few sessions amid a decline in US bond yields and expectations that the Federal Reserve is done with raising interest rates. FPIs bought shares worth over $1 billion in November after offloading shares worth $4.7 billion in September and October.

Market observers believe that the outcome of the State elections could have a bearing on the FPI flows. “If the State election results turn out to be favourable for the ruling dispensation, the market will stage a rally. FPIs are unlikely to miss that rally by big selling. They might buy into financials where the valuations are fair,” said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The market will surge if FPIs indulge in large short covering in the F&O market and increase buying momentum in the cash market post these results, said Relli.

Short-term volatility

Experts, however, caution that there could be some profit-taking at higher levels due to end of near-term uncertainty, rich valuations and as FPIs head for holidays after December 15. “Election results can create short-term volatility and uncertainty in the market. The key to weathering election-related volatility lies in adopting a diversified equity strategy,” said a recent note by Quantum AMC.

India remains a bright spot in an uncertain global economic environment, with a better-than-expected year-on-year GDP growth rate of 7.6 per cent for the September quarter. The country’s manufacturing sector activity continued to expand in November, with the S&P Global Purchasing Managers’ Index rising to 56 from 55.5 the previous month.