Will Arvind Kejriwal's AAP be a spoiler for the equity market?

The impressive debut by Arvind Kejriwal's Aam Aadmi Party (AAP) in the Delhi assembly polls has caused a flutter not only in political circles but in the equity market as well.

Many are wondering whether AAP, which has announced its national ambitions, may end up cutting into the votes of the established political parties in the general election likely in May, lowering their seat tally and thereby the chances of a stable government at the Centre.

Most fund managers surveyed in the fourth Business Today's Morningstar Asset Allocation Survey felt the BJP-led National Democratic Alliance had a good chance of forming the next government at the centre and 67 per cent of them expected the market to rise if the NDA came to power.

But there is apprehension that the rising popularity of AAP could spoil electoral equations and lead to a fractured mandate.

Markets do not like uncertainty. Despite foreign institutional investors (FIIs) pumping in another $227 million last week into the market, the BSE Sensex lost 342 points, or 1.6 per cent, to end the week at 20,851.33.

Last month, the Sensex had touched its all-time high of 21,483.73 on a reasonable expectation that the NDA government would come to power by June. But with AAP in the fray, the NDA's chances of getting a majority have receded.

The market doesn't expect the UPA to be voted to power. But fund managers don't see the market rising if some third-front coalition comes into power. The market wants a government that will restart the reform process and bring back growth, and is skeptical about any third front combination doing so.

Currently, the odds still favour the NDA, but the rising popularity of parties like AAP can act as a brake. Until the general election and a stable government thereafter, the markets will continue to remain volatile.

Intermittently, the market will react to the FII inflows, which have been their lifeline for some time, since the economy remains in poor shape. In 2013, FII infused $20 billion into Indian equities. Usually FIIs make their allocations for their favoured markets at the beginning of the calendar year. It has to be seen how they react this time with the US economy showing signs of revival and US Federal Reserve's tapering having begun from January 1.

This week, companies will begin announcing their latest quarterly results as well, starting with Infosys on Friday, January 10. The market will keep a close eye on this too. Any positives and greater visibility on growth will see an improvement in the market.

Internal and external economic data, too, will be released this week and that in turn could affect the market.

Industrial production (IIP) data for November 2013 will be out on Friday. Though no great improvement is expected, any major fall will affect the market adversely. The IIP declined 1.8 per cent in October 2013, against 2 per cent growth in September. The government will also announce its December 2013 balance of trade (import & export) numbers on Friday.    

On Thursday, the European Central Bank will announce its interest rates. Expectations are that it will keep the rates unchanged at 0.25 per cent.

The US will also release its unemployment rate and non-farm payroll data on Friday, which in turn could influence its tapering schedule.