1. Markets rally on UP election results, but these 5 factors may stop the party

Markets rally on UP election results, but these 5 factors may stop the party

Traders and investors are watching out for key factors including the government’s ability to deliver on the promises, US Federal Reserve’s rate hike and guidance, current markets valuations, BJP’s position in Rajya Sabha, and corporate earnings.

By: | Published: March 14, 2017 1:24 PM
While experts are bullish on markets remaining firm after rallying on BJP’s landslide win in UP elections, they also caution against the factors that could spoil the party.

Now that the markets have rallied on BJP’s landslide win in UP state elections, with NSE Nifty hitting a new all-time high of 9,122.75 points, while experts are bullish on markets remaining firm, they also caution against the factors that could spoil the party. The key factors they are on a lookout for include the government’s ability to deliver on the promises, US Federal Reserve’s rate hike and guidance, current markets valuations, BJP’s position in Rajya Sabha, and corporate earnings.

Here’s what analysts have to say:

Nilesh Shah, Managing Director, Kotak AMC, has said that the United States Federal Reserve’s guidance will be critical for market direction. The US Fed is likely to announce a 25 basis points hike in key rates at its meeting tomorrow. The second hike in four months could prompt investors to flee back to investing in the US markets in pursuit of safer, higher returns, putting brakes on emerging markets. Moreover, any guidance on further tough stance on interest rates will weigh even more. Indian markets may see a pause on the back of the Fed decision, Shah said in an interview to ET Now.

Manish Chokhani, Director, Enam Holdings, says that while the country is seeing reversal of voting based on caste & community, the expectations are very high from the government now. It will be hard for the government to meet aspirations of the youth in UP in two years, Chokhani said in an interview to ET Now. Notably, the government has about two years left before it faces the Lok Sabha elections in 2019, where its prospects in the state of UP will be crucial for its hopes to secure a second term at the centre.

Brokerage and research firm Nomura says that while BJP’s sweep in Uttar Pradesh is a positive surprise across markets – bonds, equities and rupee, it still doesn’t see any major impact of election results on reforms and economic outlook. BJP still needs to build consensus to pass legislative reforms as before, since BJP’s seat tally in the Rajya Sabha will still remain below the absolute majority before the 2019 Lok Sabha elections. BJP is 50 seats short of majority in Rajya Sabha, whereas the state offers only 10 before the 2019 elections, out of BJP will likely get eight.

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Brokerage and research firm Religare Capital Markets goes as far as to suggest investors to sell into the rally amid an unfavourable risk-reward ratio, while watching out for pro-poor policies. “There are no direct plays on the key policy initiatives of the government (e.g. Swachh Bharat, Make in India, Digital India etc). thus, even though the policy visibility improves, we don’t see an up-move in the earnings trajectory based on this alone,” it said. “A step-up in pro-poor and social welfare policies need to be closely watched for ahead of the 2019 general elections as these could be inflationary and negative for equity markets,” it added.

Further, analysts are also warning against current valuations in Indian equities. Many believe that while the valuations are not extremely stretched, they are not cheap either. Indian markets are currently trading at a premium to emerging markets. Investment advisor Sandip Sabharwal told ET Now that investors on the sidelines will continue to wait for dip in markets.

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