Stock markets optimistic post state poll results. Are the valuations justified?

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Motilal Oswal Financial Services. For instance, BJP had lost these three states in December 2018, but won the 2019 Lok Sabha elections with a better majority than in 2014. Local issues predominantly influence state elections, while economic growth takes center stage in general elections.

This time around, state elections were marked by welfare schemes/freebies, particularly those targeting women and girls. The free handout strategy may continue in the run-up to the general elections and could keep state finances under pressure. “Investors were worried that a poor showing by BJP in state elections would increase the risk of more fiscal populism," said a Nomura Global Markets Research report dated 3 December.

“As such, the actual results should calm such fears, although a BJP victory across most states does not necessarily reduce the likelihood of competitive populism recurring as a dominant theme into the 2024 general elections, in our view," its economists added. On the bright side, stocks of companies with rural and healthcare exposure may benefit from the welfare schemes. Oil marketing companies might also see an improved earnings outlook with the reduced likelihood of retail fuel price cuts.

Midcaps, smallcaps, and PSU stocks are expected to see a positive rub-off as well. Despite the reduced political uncertainty and the easing of crude oil prices, corporate earnings need to catch up to justify India's high valuation multiples. The MSCI India index is trading at a one-year forward price-to-earnings of 21 times, showed Bloomberg data.