BJP’s massive UP win: Implications for stock markets this week?

A clean sweep by BJP in UP by winning a historic 324 seats (out of 403) has set the stage for some major fireworks on Dalal street when the markets open on Tuesday post the Holi long weekend.

BJP wins 80% of the seats in UP assembly

Though the stocks are almost close to their historic peaks after having risen by around 10% in the first 2 months of 2017 and also having factored in a possible BJP win in UP, the magnitude of the win and the confidence boost this lends might see the figures climbing way ahead, setting a new record in the coming week.

Nifty has up 10% in the last 2 months (Jan’17-Feb’17)

The sheer size of the state and the number of MPs it sends to Rajya Sabha (31 out of 245) can completely change the equation in the upper house giving majority to BJP led NDA and hence affording it more flexibility to push through reforms. Also such a huge win is a validation of the popularity of the prime minister Modi’s extreme measures like demonetization and his image as a crusader against the rich and a leader able to take on strong measures. This validation will in-turn embolden the government to take on more such bold reforms in the run upto 2019 general elections.

Most economists had criticised the demonetization, which removed more than 80% of the currency in circulation, as a whimsical move done in haste with little planning. They had feared its negative effects on GDP growth but to everyone’s surprise the 3rd quarter ending December’16 GDP numbers showed a robust 7% growth.

The free hand to make major reforms in the short term and an increased confidence in BJP’s win in 2019 in the medium term are the signals which both foreign and domestic investors will latch on, pushing the stock rallies.

These rallies are expected to take off starting Tuesday morning and will last for a few days before valuations which are already stretched are expanded to the limits. Also the impending rate hike by US federal reserve which is expected to meet on 14/15th March will make investment inside US more attractive and hence can cause lowering of US inflows into the Indian equity markets.

Next week is going to be when markets touch new extra-ordinary heights, followed by a rightful correction before finally settling on increased baselines.