With polls out of the way, markets will shift focus to earnings, macros

Now that the elections in Karnataka are over, the focus of the market going forward will be on the weakening macro situation, market valuations and corporate earnings, brokerages said, adding that the policy impact of the closely contested election in the southern state could be felt if the government takes a pro-rural stance ahead of elections in three key states later this year and general elections next year.

A likely pro-rural stance by various state governments and the central government could work in favour of the consumption theme, brokerages said.

Meanwhile, the Bharatiya Janata Party, which on Tuesday emerged as the single largest party in the Karnataka election, was called on Wednesday evening by the Governor Vajubhai Rudabhai Vala to form the government.


BS Yeddyurappa will take oath as chief minister on Thursday.

The Nifty, amidst all the political drama during the day, ended down 60.75 points or 0.6 per cent at 10,741.10 and Sensex ended down 156.06 points or 0.4 per cent at 35,387.88 on Wednesday.

Indian markets were also pressured by weakness in Asian markets after North Korea threatened to pull out of the upcoming summit with the US although Indian indices managed to recover some losses and end off day’s lows of nearly 1 per cent.

CLSA
India's macro situation is likely to remain under pressure as the focus on various central and state governments turn more pro-rural going forward, said Hong Kong-headquartered CLSA. Because of the adverse macro and continued earnings downgrades, the firm believes the risk-reward in the Indian stock market is unfavourable though benchmark indices are within touching distance of all-time high levels. The brokerage has increased weightage on consumption theme in its model portfolio given the likely pro-consumption stance of the government. CLSA has added Zee Entertainment and Dr Lal PathLabs to its model portfolio, and deleted SBI.

Kotak Institutional Equities
A six-month hiatus in India’s election schedule will lead to the market attention increasingly shifting towards weakening macro and earnings, said Kotak Institutional Equities. India may witness weaker macro in calendar year 2018 and financial year 2018-19 due to likely higher inflation/interest rates and a possibly higher current account deficit/ weaker currency. The brokerage is confident of a recovery in earnings. However, India’s worsening macro is reflected in rising bond yields, which is quite discomforting when market and consumption stocks are trading at high valuations, said Kotak.

Nomura
The photo finish Karnataka poll result should reduce the possibility of an early general election. In terms of policies, the impact could be felt in the BJP focusing on lifting rural income and alleviating farm distress because of coming elections in three agrarian states — Madhya Pradesh, Rajasthan and Chhattisgarh — and the 2019 general election, said Nomura. Risks from rising oil prices and expectation that political uncertainty will rise again as the 2019 elections approach still suggest caution on the macro front, it said. If the BJP is able to form a government in Karnataka, it would raise expectations of BJP-led governments in the three states going to polls later this year, it added.

UBS
The market has priced in the return of Prime Minister Narendra Modi to power in the 2019 general election, but opposition alliances will be a key element, said UBS. Stocks with exposure to rural areas will continue to do well irrespective of whether the policy tilt towards rural or agri sectors is real or just rhetoric, the report added. Hero MotoCorp, Shriram Transport and Ujjivan Financial are among UBS’ preferred rural beneficiary stocks. The firm continues to expect cuts to consensus Nifty earnings estimates. UBS, which has base case Nifty target of 10,500 by December, said riskreward in the market is not attractive.