Poll results alone may not be enough to fire up market, corporate sentiment

Moneycontrol has synthesised the database to collate information of stocks, with a market capitalisation of over Rs 1,000 crore, that has increased more than 50% in each of the last three Samvat (the period from one Diwali to next). So without further ado, let's find out which stocks are booming this Diwali:

Stock prices are expected to soar on Tuesday, as bulls cheer BJP’s stellar performance in the assembly elections, particularly in Uttar Pradesh where it beat the most bulish forecasts by a wide margin. The popular view is that benchmark indices will make a new high shortly.

The results are definitely a near term sentiment booster, as it goes on to show that the Modi government has not lost any political capital because of demonetization. In theory, this should embolden it to push for more radical reforms.

More importantly, it has raised hopes of the NDA government retaining power in the 2019 general elections, thus assuring investors of policy continuity. A mediocre performance in UP would have stoked concerns of populist measures in the run up to the 2019 elections.

And yet, the assembly election results in themselves are unlikely to transform the economy or the corporate investment cycle.
In fact, a section of the market is already fretting about Modi’s promise of farm loan waiver in UP, and worried about demonetization like radical measures that could cause jerks in the economy.

Also, as Finance Minister Arun Jaitley said in an interview to Network18, many reforms have now become election neutral.

From an economy, stock market and corporate perspective, it is not the headline grabbing reforms that matter anymore. Rather it is the execution of some of the key reforms already underway--mainly GST-- that will make all the difference.

Among the key challenges before the government right now are the resolution of the bad loan mess in the banking sector, labour law reforms and creation of jobs. Then there are the smaller, but equally important social reforms--better healthcare facilities, quality of education, providing affordable housing, skills training to make youth employable—which will go on to complete the big picture.

Of the challenges, bad loans appear to be the trickiest. It is right now a situation where the balance sheets of banks as well as the companies they have given loans to, are under stress. Unless demand for their goods picks up soon enough, companies will not repay the loans they have taken. If more loans turn bad, banks will need capital to compensate for the loans that are not going to be repaid. The government does not have the money to recapitalize public sector banks. And unless it walks the talk on some of proposed reforms for the sector, these banks will not be able to raise money from the market because investors will be wary.

There are a quite a few things going in favour of the economy, like inflation being under control, robust foreign exchange reserves, and downward trending interest rates.

But it will be hard to capitalize on these tailwinds unless some of the big problems are fixed. The stock market already seems to have factored in a decent showing by the BJP in the elections. This could be seen from the muted response on Friday to the exit poll projections announced the previous evening.

Stock prices--large caps as well as midcaps--have already run up a fair bit and the recovery in earnings looks at least a couple of quarters away. In short, there are no compelling reasons for a big upmove in the market near term.

At the same time, expensive valuations and a possible hike in interest rates by the US Federal Reserve make it vulnerable to a sell off.

Follow@sant0nair