Stock investors may have to brace for turbulence this week amid indications that a victory for Aam Aadmi Party in the Delhi election, strong US jobs data and a deepening crisis in the Eurozone may spark a selloff. Although an AAP win would do little to change national political equations, Dalal Street may view such an outcome as a setback for the Narendra Modi-led BJP.
The stock markets will most likely open weak on Monday, after most exit polls on Saturday predicted an AAP win. An average of five exit polls gave AAP 41 seats, BJP 27 and Congress 2 in the 70-member House. On Friday, the BSE’s mid-cap index fell 1.1%, the small-cap index declined 1.8% while the benchmark Sensex dropped 0.5%. “There might be a small correction because the markets have factored in a result in line with exit polls, though the mar s, though the mar gin for AAP in exit polls is con siderably high er,“ said Nirmal Jain, chairman of India Infoline.
Some brokers believe selling by traders scurry ing to liquidate ing to liquidate bets built on borrowed money may precipitate the slide, especially in midcaps and small-caps. Disappointing December quarter earnings of Indian companies are also weighing on sentiment as current stock valuations, especially of mid-cap shares, had priced in the prospect of higher profits.
“We think the market is likely to see a correction of around 5% over next two months on account of supply of paper, rich valuations and weak earnings. A loss in Delhi polls for BJP could further provide an excuse for the correction,“ said Jyotivardhan Jaipuria, head of research, Bank of America Merrill Lynch.
Analysts said many traders had built sizeable bullish positions in the run-up to the Budget later this month but few expected the Delhi election results to tilt in favour of AAP. The results of the Delhi polls will be declared on Tuesday. “The markets may have a subdued opening on Monday as people were already expecting a touch-and-go situation for Delhi elections. The results do not have any bearing on the government while it’s good to have a course correction like this,“ said UR Bhat, managing director of Dalton Capital Advisors (India).
Some believe that though insignificant, the outcome could have a `sentimental impact’.
“Delhi has smaller economic relevance, but the outcome of the state election will have some sentimental impact on the market. In the past one week, markets have been on a downtrend due to disappointing quarter earnings. That is why the Delhi election is gaining significance,“ said Prateek Agrawal, CIO, ASK Investment Managers.
Some investors worry that a victory for Arvind Kejriwal-led AAP in Delhi would make it tougher for Prime Minister Narendra Modi to push through reforms -mainly in the areas of mining and labour -considered crucial for the speedy recovery of business sentiment and the economy.
BJP’s performance in Delhi could have a bearing on the party’s prospects in the upcoming elections in Bihar and West Bengal, said analysts. “We sense some anxiety around this event amongst investors. The worry centres around possible loss for PM Modi’s party, BJP, signalling possible waning of his popularity,“ said Gautam Chhaochharia, head of India research at UBS.
A few others felt that though a market correction is likely, a loss for BJP in Delhi will not impact the Modi government’s reformist agenda. “If BJP loses, it will mark a reversal in the party’s electoral fortunes after a stellar run over the past 15 months. While the market may correct in case of a BJP loss, we believe that Delhi polls are too insig nificant to either be seen as a dip in Modi’s popularity or for him to alter his reformist policy path. With (the) results season continuing to be weak and a possible setback for BJP in Delhi state elections next week, the consolidation phase might extend,” said Mahesh Nandurkar, executive director, CLSA.
India has been among the best-performing emerging markets in the past year because of hopes the Modi government would resuscitate the economy. The 50-share Nifty has gained almost 45% since last February, when the market rally started ahead of the general elections which saw the BJP come to power at the Centre.
Apart from the Delhi poll results, betterthan-expected jobs data in the US may also spook investors as they fear the Federal Reserve may increase rates sooner than expected. Traders fear stronger jobs data could lead to the dollar firming up against the rupee, resulting in some foreign institutional investors selling. The Dow Jones Industrial Average fell 0.34% to 17,824.29 on Friday.
Investors are also keeping a watch on the situation in the Eurozone after S&P cut Greece’s sovereign credit rating another notch into junk territory on Friday, citing the country’s growing cash constraints.