Markets pricing in BJP win in UP, unfavourable outcome could see 10% fall

After a 3,000-point, or 12 per cent, rally in the S&P BSE Sensex from its December lows, the market is headed for a period of volatility, as it gears up for the outcome of the ongoing Assembly polls. The outcome of the polls in Punjab, Uttar Pradesh (UP), Goa, Uttarakhand and Manipur — to be announced on March 11 — could create distractions or positives for the government and will be interpreted as a referendum on its note ban drive, experts say.Experts say the markets will remain range-bound but choppy till the outcome of the Assembly elections is known. While most of them rule out a runaway rally in case of a favourable outcome, negative news can see the markets correct 8-10 per cent over time, they say. Commodity Trading Tips

“A phenomenal majority could be sentimental triggers that can push the markets to all-time highs; though I feel most of the positives are already priced in,” says U R Bhat, managing director, Dalton Capital Advisors.Some analysts have raised a concern that markets are becoming expensive at current valuations. The Sensex is trading at a price-earnings multiple of nearly 22 times, which is high compared with 23 times underlying earnings reached in July last year, which was a five-year high. “With no material change in earnings estimates and no visible evidence suggesting the risk of consensus earnings downgrades – seen over the past three consecutive years - is now firmly behind us, the liquidity-driven expansion in valuations looks unlikely to sustain,” wrote Abhay Laijawala, head of India research at Deutsche Bank Group in a recent report. Nifty Trading Tips

“Given that the markets are overvalued, negative news can trigger a reaction and the Nifty50 index could correct 150–200 points when the markets open after the election outcome (on Monday 14), and can fall 8–10 per cent over time,” Bhat added. Nischal Maheshwari, head of institutional equities at Edelweiss Securities, however, says, “The markets are reacting more to global events than domestic developments. Though an unfavourable verdict can trigger a knee-jerk reaction in the markets, I don’t see a sharp correction here on,” he adds. Future & Option Trading Tips