Poll performance: Nothing to spark a tearaway rally in the markets

With the market favourite — the BJP — winning decisively in two States, but stopping short of sweeping the Assembly elections in all four, there is little in the State election results to trigger a tearaway rally in the indices.

Opinion and exit polls had already signalled a BJP lead and market participants have adjusted their Sensex targets for a ‘business-friendly’ regime with alacrity. Therefore, these results are probably already priced in.

However, there is enough in these Assembly results to keep the market cheer going. While one can argue on whether there was indeed a ‘Modi wave’, the four States have demonstrated that there is certainly a strong anti-Congress wave at work. Indian voters, it appears, are as keen on a political change as the stock markets are.

This may offer the markets hope; the anti-incumbency wave can strengthen over the next few months, peaking just in time for the Lok Sabha elections, anointing a new government at the Centre.

Splintered? However, the close-run contest that BJP fought in Delhi and Chhattisgarh may not go down so well with the markets.

The strong show by the challenger — the Aam Aadmi Party — in Delhi and the neck-and-neck show in Chhattisgarh may resurrect worries that the 2014 elections may not just turn out to be a two-horse race.

This could well mean a splintered vote, something the market hates. Historical trends suggest that stock markets care more about a decisive verdict that leads to a stable government at the Centre, than the identity of the party that wins.

Back to business But with Sensex having rallied 20 per cent since August and many stocks zooming 60 per cent or more, the reaction to these elections may prove to be short-lived, in any case.

For the rally to sustain into next year, the fundamentals, which have supported this rise, need to hold up.

Currency stability has been one big factor driving recent market optimism. The rupee has appreciated about 10 per cent against the dollar since August (68.8 to 62 levels), helped by inflows into FCNR accounts, a separate dollar window for oil marketing companies and other policy measures.

Gold imports have flagged and exports have picked up, sharply cutting the current account deficit to 1.2 per cent of GDP from over 5 per cent levels, alleviating another big worry for markets.

Profit performance Nor can one ignore the surprising improvement in the profit performance of India Inc in the September quarter.

Sales growth for Sensex companies in the July-September period was 14 per cent, up from the 2 per cent growth in the June quarter. Net profit grew 10 per cent, against a 4 per cent decline in the previous quarter.

Investment activity There are expectations of a pick up in investment activity with the new Cabinet Committee on Investments approving over a 100 projects worth some $57 billion. And finally, let’s not forget the role played by the US Fed by putting off its taper plans, which ensured continuing interest in Indian equities..

Overall, the election verdict may occupy centre-stage in the markets for the next few days.

But it will soon be business-as-usual and for the current valuations to sustain, the recent improvement in India’s macros and corporate profits must continue.

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