Karnataka elections outcome: Will BJP defeat add 'political risk' to market ahead of 2024 general elections?

If history is to go by, BJP's loss in Karnataka assembly elections may not mean much in terms of the likely outcome of 2024 elections, said analysts. Kotak Institutional Equities noted that BJP’s performance in 2018 state elections was quite modest, with the party unable to win simple majority in Chhattisgarh, Karnataka, Madhya Pradesh and Rajasthan in the respective assembly elections. That said, BJP subsequently formed governments in Karnataka and Madhya Pradesh, the domestic brokerage noted.

"Meanwhile, BJP outperformed significantly in the Lok Sabha elections in 2019 in those states. As such, we do not expect markets to be overly perturbed, even if BJP was to lose in the forthcoming state elections," Kotak Institutional Equities said.

Karnataka has a long track record of voting out the incumbents, said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, who does not see any impact of Karnataka election outcome on market sentiment in the near future.  

In the recently concluded state elections, Indian National Congress (INC) emerged victorious in the 2023 Karnataka elections by winning 136 out of 224 seats, while the ruling BJP witnessed its seats reduce from 104 seats in 2018 to 65 seats in 2023.

Kotak noted that despite a large fall in the number of seats, BJP’s vote-share witnessed a marginal decline compared to 2018. "While the election results may introduce some ‘political risk’ to markets and rejuvenate the opposition, we note that Mr Modi enjoys very high approval rating on the national level," it said.

Net-net, it said INC’s resounding victory in the Karnataka assembly elections may not mean much for the likely outcome of 2024 elections given  continued high popularity of Modi and the trend of BJP outperforming in national elections versus state elections.

"The market has recently found support from improved macro-outlook and low-quality earnings beat in

4QFY23 results season but largely ignored weak micro-outlook and growing disruption risks, which may weigh on ‘rich’ multiples of ‘growth’ stocks," it said.

Vijayakumar said even though the Congress victory in the Karnataka elections was much better-than-expected, it is unlikely to have a negative impact on markets, which in the near-term will be driven mainly by FPI inflows backed by improving fundamentals.

Meanwhile, Elara Securities expects upcoming state elections, in the backdrop of unfavorable outcome for the ruling party at the Centre in Karnataka elections, should pave way for a possible decline in petrol and diesel retail prices, supporting a drop in both inflation expectations and inflation. 

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