The Karnataka election is being seen as the semi-final to the 2019 general elections and appears to be heading towards a close fight
The markets have not yet priced in the possibility of a loss for the Narendra Modi-led Bharatiya Janata Party (BJP) in the upcoming assembly election in Karnataka.
Though analysts expect a knee-jerk reaction to the outcome on May 15, they believe the markets will start focusing on other global and domestic events soon after.
Nilesh Shah, managing director at Kotak Mahindra Mutual Fund, says the S&P BSE Sensex could dip sharply if the BJP loses in Karnataka.
He, however, expects the recovery to be equally swift. A win, on the other hand, could take markets higher.
“The markets are not factoring in a loss for the BJP in Karnataka yet. On the contrary, there are reports that suggest that the BJP will win - and probably that’s why the S&P BSE Sensex was able to cross the 35,000 mark in April.
"That said, stability should return after a knee-jerk reaction because the markets will look at events beyond the Karnataka election outcome,” he said.
And the data since 2014 supports this argument.
An analysis of market returns, as represented by the benchmark indices - the S&P BSE Sensex and Nifty50 - suggests in all cases (except the Bihar assembly election outcome), the markets have given a positive return in one month from the day the election outcome was known.
“The election outcome was on predicted lines and hence there was no reason for the markets to panic.
"Once the outcome was known, the markets started focusing on other domestic and global cues for direction,” said G Chokkalingam, founder and managing director at Equinomics Research.
The Karnataka election is being seen as the semi-final to the 2019 general elections and appears to be heading towards a close fight, reports suggest.
Besides beefing up the tally in the Lok Sabha (Karnataka has 28 seats) and Rajya Sabha (12 seats), this election is important for the BJP to make inroads into south India, a region that has proved difficult for it to foray into.
The state is significant for the Congress too, because the party has been facing a tough fight against the BJP in most of the states it used to rule.
“The markets are not discounting a defeat for the NDA yet. What they do believe is that it will be a close fight between the Janata Dal (Secular), Congress and the BJP.
"In case the Congress bags Karnataka on its own, it will be a dampener for the markets. In that case the Nifty50 can correct to 10,300 levels,” said U R Bhat, managing director, Dalton Capital Advisors.
The S&P BSE Sensex has rallied 7 per cent, or nearly 2,200 points, in April, the best monthly gain since March 2016.
This has put the S&P BSE Sensex among the top performers globally.
Rajat Rajgarhia, chief executive officer (institutional equities) at Motilal Oswal, too, expects the immediate reaction to be positive in case the BJP wins.
“The markets move on from election outcomes very quickly. Factors such as earnings, economic growth and interest rates have a more direct impact on them. The Karnataka election outcome impact, too, will be short-lived,” he said.
Chokkalingam expects the markets to rally around 5 per cent from here on in case the BJP is able to form the government in Karnataka.
“The positive sentiment can take the Nifty50 past the 11,000 mark over a few sessions,” he said.
Photograph: Danish Siddiqui/Reuters