Assembly election results, economy data to drive markets this week

The BSE Sensex is expected to respond positively on Monday to the results of state assembly elections declared on Sunday. Sentiments have been positive for some time now with the Sensex just 325 points behind its all-time high which it touched on November 3.

"The equity markets will respond very positively as investors are likely to read the election results as a forerunner to an NDA in June," says Gautam Trivedi, Managing Director and Head of Equities at Religare Capital Markets. "The fact that the Congress got only 30 per cent of the vote suggests that voters are clearly looking for a change."

What led to the Congress debacle? "Inflation, corruption and lack of job creation are the main issues. The question is: with six months to go for the general election what steps will the UPA now take? There is concern that if they resort to large scale spending then the fiscal will go out of whack," he adds.



Speaking to Business Today recently, Motilal Oswal, Chairman and MD of Motilal Oswal Financial Services said he remains positive about the markets and has been buying at current levels. "Markets are all about the 'rate of change'. Incrementally, pending and overdue agendas of the present incumbent government will be taken up in the remaining six months of its tenure, if it wants to attempt to get back voters' mind share. Populism and doling out of freebies is not working," said Oswal. "If not this, then the expectation of a change in government, led by Narendra Modi, will fuel optimism with expectations of important reforms happening after six months. Markets will pre-run on this expectation as well. So, political factors will play a major role in the markets moving up."

Sentiments and liquidity are the only two factors that drive markets. This is true for all asset class and across the globe.

DOMESTIC FACTORS:

Fundamentally nothing has changed on the domestic scene and the worst isn't over for the Indian economy. But market sentiment has improved on the expectation that the NDA alliance led by Narendra Modi will come to power after the general elections and he will bring in growth and development. This may be premature, but that's the way the markets work. Even if it is assumed that the NDA will be voted to power, it will take at least a year for it to bring about the changes the market hopes for. This means nothing will reasonably happen for at least next 12 to 18 months.

On Thursday, December 12, the government will announce the industrial production (IIP) data for October and consumer price index (CPI) for November. In October, the CPI stood at 10.09 per cent. If either index gets any worse, markets will see huge correction.

EXTERNAL FACTORS:

In 2013, Indian market have risen purely because of infusion of liquidity and not because fundamentals of the economy have improved. The weakness in the US economy was the primary reason for easy money flowing into our market. But with the unemployment rate in the US falling to 7 per cent in November - the lowest since 2008 - there are concerns that the US Federal Reserve will end its $85 billion every month bond buying programme.

Though this much talked off 'tapering' is bound to happen sooner or later, it will not be the end of the US's quantitative easing, it will just slow down the pace of money infusion into the US economy. Since 2008 the US Federal Reserve has pumped close to $4 trillion into the economy.

India hardly has any foreign exposure in its bond markets, so tapering off will not have a direct impact on it. But it will certainly lead to negative sentiment. Whenever it happens, tapering can slowdown the flow of money into our market and can exert pressure on the Indian currency which can be a dampener for our markets and our economy.

On a broader level, the Indian economy is still on a weak footing and unless the investment cycle picks up and growth goes back to 7 to 8 per cent, India will not be attractive for global investors. Until then, the equity market movement will be speculative, depending more on external and domestic factors than on economic fundamentals.