The recent triumph of the BJP in three out of four major state Assembly elections is poised to bolster the market's optimistic sentiment, as per a report from Kotak Institutional Equities.
Exceeding both pre-poll and exit-poll forecasts, the BJP's resounding victory is expected to solidify its stance in the Lok Sabha and further instill confidence in the party's potential win in the 2024 general elections.
"We anticipate subdued market volatility linked to elections, potentially resulting in the market maintaining elevated valuations in the short term," noted the report.
The BJP's dominant performance in the recent state elections, notably in the crucial Hindi heartland states of Chhattisgarh, Madhya Pradesh, and Rajasthan, signifies an amplified seat count and a substantial surge in vote share, surpassing even the exit poll projections.
Conversely, the Congress secured victory in Telangana, a state previously under BRS's governance and with minimal BJP presence.
Recent electoral history demonstrates the BJP's tendency to fare better in national polls compared to state-level ones.
"With the current status quo, we believe the BJP stands firmly positioned for success in the 2024 general elections. Notably, the BJP historically garners increased vote share during general elections vis-à-vis state elections, as witnessed in the 2019 cycle," the report affirmed.
Although the BJP faced setbacks in the 2018 state elections, their subsequent landslide victory in the 2019 Lok Sabha elections, claiming 61 out of 65 seats from these states, underscores their strengthened position.
This substantial victory in the states is anticipated to curtail the possibility of a substantial surge in revenue expenditure preceding the 2024 general elections, thereby mitigating fiscal slippage.
However, the market's elevated valuations might not witness a corrective phase unless prompted by a significant adverse catalyst. The recent state elections likely removed one such potential trigger for market correction.
Furthermore, the BJP's triumph in the Hindi heartland states is anticipated to amplify the bullish sentiment among domestic retail investors, evident in their robust engagement through equity mutual funds. Simultaneously, this outcome might induce a shift in the previously subdued sentiment among FPIs, potentially favoring a positive change, as highlighted in the report.
FPIs, previously concerned about the market's lofty valuations and anticipating a correction to enter the market at more favorable levels, might find their expectations faltering. This leaves them with the difficult decision of either abstaining from a market that may not correct or continuing despite reservations about prevailing valuations.
(With Agency Inputs)