Equity markets could be put through the wringer, following the Bharatiya Janata Party’s (BJP’s) pounding in the Karnataka state elections.
Typically, state elections have little bearing on the markets but the Congress’ strong showing embolden BJP opponents in the run-up to the 2024 general elections, say experts.
“After the results, people might start believing that there could be a change in regime,” says U R Bhat, co-founder, Alphaniti Fintech.
“Markets may look expensive, given that the general elections are within reach. Election years are generally not good for the markets,” he adds.
The scale of Congress’ victory in the Karnataka Assembly elections was a record in terms of both seats and vote share in nearly three decades.
“A clear majority in Karnataka is happening after a decade. That is likely to be interpreted as a setback for the BJP. Markets are likely to turn volatile. Investors will now wait for the next round of Assembly elections to gather cues on whether there will be continuity at the Centre,” says Bhat.
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In the run-up to the general elections in 2024, states such as Rajasthan, Madhya Pradesh (MP), and Chhattisgarh go to polls. However, extrapolating from state election results to national elections is fraught with risk.
“States vote differently than when you go as one nation. Maybe there could be volatility for a day or two,” says Andrew Holland, chief executive officer, Avendus Capital Public Markets Alternate Strategies LLP.
In 2018, the Congress won the maximum number of seats in Rajasthan, MP, and Chhattisgarh. Yet, it suffered a blow in the 2019 general elections. Experts say investors may not view a regime change positively as they favour continuity in policymaking. Also, a new government could raise concerns about higher government spending and the politics of appeasement.
“If there is a change of guard, then the central government is most likely to be led by a coalition of disparate parties who might work at cross purposes,” says Bhat.
The market mood is bullish amid strong inflows from foreign portfolio investors. The benchmark National Stock Exchange Nifty is less than 3 per cent shy of new all-time highs.
“The Karnataka election results may have a sentimental negative impact on the market. However, it is unlikely we will witness significant reaction from the market in response to this development,” says Santosh Meena, head-research, Swastika Investmart.
“The key resistance level for the Nifty is 18,440. There is a possibility of some profit-taking. A break above it could potentially lead to further gains towards the 18,630–18,690 range. On the downside, the immediate support level is at the nine-day moving average (DMA) of 18,200, followed by the 20-DMA at 18,000, with a cluster of 100- and 200-DMA at 17,800, which will act as significant support levels during any correction,” he says.
For stock market mavens, the pageantry of politics and stock market returns is a compelling spectacle, even when none of the expected outcomes come true.