Political worries set to check Indian stock market bulls

BENGALURU (Reuters) – Indian stocks are expected to erase recent losses and rise a little this year, but an array of political developments at home and overseas along with just a steady economic growth outlook will likely restrain the market, a Reuters poll showed.

While the Indian stock index gained nearly 7 percent in January and hit a lifetime high, it is down about 4 percent since then, tracking the rout in global equities as worries of a trade war between the U.S. and China intensified.

The consensus from the latest Reuters poll of over 50 strategists and brokers taken May 21-30 points to gains for the BSE Sensex.

The index, which is up 2.6 percent for the year, is now expected to gain 1.7 percent from Tuesday’s close to 35,550 by end-2018. It is then forecast to hit a fresh record high of 36,300 by the middle of next year.

But over a third of respondents forecast the index to be lower then, including one strategist who expects it to dip to 27,500, a level not seen since January last year.

The consensus view is also the weakest six-month outlook since at least the financial crisis and is also a slight downgrade compared to three months ago.

A majority of poll respondents attributed their views to national election results or political developments outside the country.

More than half the losses so far this year have come after an inconclusive Karnataka state election earlier this month.

That has also coincided with the turmoil in global financial markets amid the political chaos in Italy.

“Ahead of the next year’s general election and ongoing global political uncertainties, the stock market will not show any large up or down move, remaining consolidated,” said Vedant Manore, a consultant and trader at ‎Edelweiss Financial Services.

“But, if the (current) government wins the majority of seats in Parliament, stock prices would rally on hopes of quick policy decisions.”

Indeed, the more tempered view for a market used to double-digit gains in recent years was driven by the political situation in Karnataka which has clouded the outlook for general elections next year.

The surge in crude oil prices, India’s biggest import item, has also weighed on stocks as it is inflationary and may push the Reserve Bank of India to raise rates much earlier than previously thought – possibly as soon as August. [RBI/INT]

India’s economy probably gained a little momentum in the first three months of 2018 which should ensure that it remains the world’s fastest growing major economy, a separate Reuters poll showed.

Still, foreign portfolio investors (FPIs) sold $ 1.4 billion of Indian stocks this month, in line with a wide sell-off in emerging markets, driven by the recent rise in U.S. Treasury yields.

After hitting a 10-year high of 25.69 in January, the BSE Sensex price-to-earnings ratio fell to 23.44 in May – above the long-term average of 18.74, suggesting stock prices are still expensive.