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Will Modi click in UP? Five factors tell you not to sell stocks even if he doesn't

Some analysts think they State election results be a precursor to the 2019 general election and bear proof of the popularity of the Modi government.

, ETMarkets.com|
Last Updated: Mar 09, 2017, 01.52 PM IST
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The multi-stage assembly elections in five states – Uttar Pradesh (UP), Punjab, Uttarakhand, Goa and Manipur –started in early February and are coming to an end this week.
The multi-stage assembly elections in five states – Uttar Pradesh (UP), Punjab, Uttarakhand, Goa and Manipur –started in early February and are coming to an end this week.
NEW DELHI: The domestic equity market, which has rallied 9 per cent in 2017, faces an acid test when the results of the assembly elections are announced on Saturday, March 11.

The multi-stage assembly elections in five states – Uttar Pradesh (UP), Punjab, Uttarakhand, Goa and Manipur –started in early February and are coming to an end this week. The optimism in the market is backed by expectations that the BJP will be able to get a majority in UP.

Exit poll results will be out on March 9 and that could create volatility in the market. Analysts are not bothered much, though.

“If the election results are the way the market is anticipating now, i.e. a clean sweep for the BJP, the market will definitely breach the previous high and climb new peaks,” Sudip Bandyopadhyay of Inditrade Capital, said in an interview with ET NOW.

State election results are important this time. Some analysts think they will be precursor to the 2019 general election and bear proof of the popularity of the Modi government, which might have lost some brownie points following the demonetisation drive.

It is all about reforms, which can take India to new heights and a strong central government will be able to initiate those changes at a faster pace. A weak showing by the BJP in Uttar Pradesh could increase the clout of the opposition and increase the possibility of more populist polices in the runup to the 2019 general election, said experts.

“A strong central government will be able to push through reforms a lot faster, but if that condition is not there. But the situation will still look good because the consensus is certainly towards reforms regardless of which party we are talking about,” Mark Mobius, executive chairman of Templeton Emerging Markets Group told ET.

“It should not affect the market much, assuming that there is no significant upset in these elections," he said.

Going by the buzz on Dalal Street, here is a list of top five factors that tell us that there is immense optimism in the market and in case of a negative outcome for the BJP, one should look to buy on dips.

Optimism from opinion polls: The BJP’s recent success in municipal and district-level elections has prompted traders to keep a close watch on the ongoing assembly elections in Uttar Pradesh. If the BJP manages to form a government in UP or come out with majority votes, the market is likely to head towards new highs.

UP has 403 Assembly seats, which is about 60 per cent of the total seats in these elections. “We feel a tally of 180 or more seats by either party/alliance would offer it a decent chance to form a government in the state with support from smaller parties. It would likely be seen as a strong performance," Barclays said in a report.

"However, a tally of less than 140 seats would be considered weak. Based on four late-January opinion polls, published after the announcement of the SP-Congress alliance, the BJP was projected to win 123-202 seats in the 403-member UP assembly,” the report pointed out.

Immense liquidity: The domestic market has managed to climb a wall of worries in the past three months and one major factor contributing to this was availability of abundant liquidity, both domestic as well as global, in the system.

“A lot of money is waiting on the sidelines. We had our annual foreigner meet recently from where we picked a common thread, which shows most of the distributors are waiting for a big correction in the market,” Harsha Upadhyaya, CIO for Equity, Kotak Mutual Fund, said in an interview with ET NOW.

“When such a large cross-section of advisers and investors are waiting for a big correction, it usually does not come about. The fact that there is so much money with the domestic mutual funds, if you look at the average cash holding, it is about 5 per cent, which means about Rs 27,000-28,000 crore of cash was with the mutual fund industry as of last months,” he said.

Technical data: The Nifty50 is consolidating in a narrow range since the last 10 sessions, which is a good sign. The range starts from 8,820-9,000 levels. The index failed to surpass its crucial resistance level at 9,000 last week.

Consolidation is healthy and the fact that the market is getting a lot of support from the 13-day EMA is a positive sign for the bulls. Whenever the market has fallen considerably, buying has emerged at lower levels.

“Looking at the overall price development in last 2-3 sessions, we expect the Nifty50 to move beyond it. It may even hit a new high soon. Traders should continue with a buy-on-dips strategy and stay away from creating fresh short positions in the market,” Sameet Chavan, Chief Analyst for Technical & Derivatives, Angel Broking, said.

“For the coming session, 8,914-8,860 remains strong support zone; whereas the 8,993 level would be seen as an immediate hurdle, which we are anticipating to be broken soon,” he said.

Options data: On the options front, maximum Put open interest was seen at strike price 8,800 followed by 8,700 while maximum Call open interest stood at strike price 9,000 followed by 9,500.

Fresh Call writing was seen at strike prices 9,000, 9,100 as well as 9,200, which will create hurdles for the index while fresh Put writing at strike price 8,900, followed by 8,700 will act as crucial support for the index.

The market base has shifted higher towards strike price 8,700, which holds the maximum Put open interest, from strike price 8,500 while consistent Call writing at 9,000 and above is acting as tough resistance.

Foreign investors (FIIs) were net buyers in both cash market segment and index futures. They bought equities to the tune of Rs 920 crore on Tuesday while in index futures they were marginal buyers with good amount of rise in open interest, suggesting blend of both long and short formation in previous trading session.

FII positioning: Foreign institutional investors (FIIs) are slowly returning to India and that is reflected in the February and March data. Foreign portfolio investors bought equities close to Rs 9,000 crore in February and nearly Rs 3000 crore so far in March.

“FIIs had been selling in the recent past and it is only now that they are seeing some kind of stability. Policies from the Trump administration are getting a little clearer and possibly India is largely insulated if you leave aside the infotech sector,” Lalit Nambiar, Senior Vice-President & Fund Manager - Equity, UTI Mutual Fund, said in an interview with ETNow.

“From that perspective and from an international investor’s perspective, things are settling down and possibly we are seeing some amount of confidence resuming in domestic investors. And I presume FIIs will soon follow suit,” he said.

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