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Will Delhi election outcome change market mood?

A foreign brokerage in a note today said that if the Bhartiya Janta Party (BJP) loses in the Delhi elections it could be a sign of its diminishing mojo and could trigger a correction in the markets.

“An adverse showing in the Delhi polls would indicate a slowing of the momentum from the May Lok Sabha elections and the subsequent assembly polls,” said Bank of America Merrill Lynch (BoAML) in a note.

Assembly elections for the the National Capital Territory (NCT) of Delhi will be held on February 7 and the results will be announced on February 10. Arvind Kejriwal-led Aam Admi Party (AAP) is pegged to win the elections by most opinion polls.

APP is predicted to win between 28 and 46 seats out of the 70-seat assembly, while BJP is forecast to win between 19 and 37 seats. Congress is pegged to win just two and seven seats.

A loss in the Delhi polls could be a setback for Narendra Modi-led BJP, which has won most state elections after its history victory in the Lok Sabha elections in May last year.  
 

“While an outcome in the Delhi assembly elections doesn’t impact the central government led by Modi, we think the market would be concerned whether the election result is a local issue (as state elections generally are) or whether it indicates some loss of popularity for the ruling BJP,” BoAML said.

The brokerage says a setback in the Delhi elections will not “change the course of the reform agenda in India.”

Sharp rally, expensive valuations, poor earnings announcement in the third quarter and glut of paper supply are expected to weigh on the markets, believe most experts.

The Indian market, after a rally of over 30% in the past one year, trade at one-year forward valuations of more than 16 times— above its long-term averages.  

“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 the BJP could further provide an excuse for the correction,” said BoAML.

The government last week raised Rs 22,500 crore by selling 10% stake in Coal India. The centre is expected to raise another Rs 20,000 crore from the market by divesting its stake in various state-owned undertakings to achieve the disinvestment target, critical for bridging the fiscal deficit. 

Meanwhile, private issues too are expected to gather steam. HDFC Bank has launched its offering to raise up to Rs 10,000 crore of fresh equity capital.

BoAML says it maintains its year-ended Sensex target of 33,000, that’s a 12% upside from current Sensex level of 29,000.

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