How will the markets read into the state election outcome in 2023?

While markets eye both economic and political issues, in the medium-to-long term, analysts believe election results do not matter much

The outcome of state elections – Tripura, Meghalaya and Nagaland – will be a non-event for the markets and can, at best, trigger a knee-jerk reaction, said analysts. While political pundits believe that the outcome of these state elections – and the ones scheduled to be held later in 2023 – will pave the way for the general elections scheduled to be held in calendar year 2024 (CY24), market experts are more concerned on the global cues and macro-economic data – inflation, gross domestic product (GDP) growth, monetary policy trajectory – back home, which they believe will decide how the markets play out.

FULL COVERAGE: State Elections 2023

While markets eye both economic and political issues, according to G Chokkalingam, founder and chief investment officer at Equinomics Research, in the medium-to-long term, he believes election results do not matter much. The markets, he said, will focus more on the fundamentals of the Indian economy, and cues from the other global markets & economies.

"History shows that a couple of market peaks were attained during minority governments. Foreign investors give more importance to democracy in India than to political instability. Only an uncertain mandate from general elections can trigger a sharp market reaction. That said, out of the State elections pending in 2023, only Madhya Pradesh (MP) and Karnataka are the major ones with sizeable Lok Sabha seats. In case ruling party’s tally in these two states slips significantly, it could impact sentiment. As a result, a significant market recovery could be postponed to post 2024 Lok Sabha elections," he said.

Over the next few months in calendar year 2023 (CY23), nine states including Tripura, Meghalaya and Nagaland are to go to polls. The prominent ones among them include Karnataka, Chhattisgarh, Madhya Pradesh and Rajasthan.

Another major concern for equity markets continues to be the rising bond yields in the US that hit 4 per cent on Wednesday, which analysts said, is likely to act as a drag for foreign institutional investor (FII) inflows into emerging markets like India.

"FIIs cannot be expected to turn buyers in this scenario. Investors should make a distinction between FII selling on rising interest rates in US and DII buying on improving prospects for the domestic economy. Domestic economy-facing stocks like banks, capital goods, cement, select autos and fast moving consumer goods (FMCG) will continue to do well. Banking stocks are resilient and can be expected to remain strong even amidst FII selling," said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

On the macro-economic front, India’s economy, as measured by the GDP, grew at 4.4 per cent in the December 2022 quarter, as manufacturing output contracted for the second consecutive quarter and consumer demand slowed.

Going ahead, analysts at Nomura expect growth to moderate to around 4 per cent y-o-y in the January-March 2023 period. For FY24, they expect a dip to 5.3 per cent from an estimated 6.7 per cent in FY23.

"We believe India's growth cycle has peaked and is headed significantly lower than consensus expectations. High frequency data for January suggest the investment and the industrial sectors are flat from December levels, consumption is slightly higher, while weakness in export and import volumes signals weaker trade and domestic activity. Overall, India’s growth drivers are slowly fizzling," cautioned Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent co-authored note with Aurodeep Nandi.