Mahesh Nandurkar, CLSA says the BJP has suffered a crushing defeat in Bihar, clearly a setback for PM Narendra Modi and investor sentiment. A lot now depends on how this defeat is perceived by PM Narendra Modi, he adds.
On the positive side, he feels the government may accelerate delivery of services such as 24X7 power. On the other hand, legislative reforms will become tougher.
According to him, the market may fear that the prime minister will start spending more time on party politics and he would have less time available for governance. However, Nandurkar believes the Indian growth story remains intact and the potential overreaction by equity investors would be a buying opportunity.
The Indian market has already underperformed MSCI EM by 3-4 percent over the past two weeks, so some negative political news is already priced in, he feels.
Meanwhile, Bharat Iyer, JPMorgan expects that equity markets could initially be somewhat nervous on the back of the Bihar state election results.
He says the medium-term trend will, however, be determined by how economic policy evolves. The financial markets will, he believes, be closely scrutinising the impact of these results on policy making if any through to the next Budget session of Parliament.
"In terms of sector stance, we have been overweight on IT services and healthcare this year so far. We have been selective in our choice of domestic cyclicals and recommended playing a potential domestic growth recovery through high-quality financials with a strong capital and liability franchise and manufacturing sectors with low financial leverage and high operating leverage, particularly commercial vehicles, cement and select capital goods," says Iyer.
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