Variability in General Elections 2019 resulted Sensex demotion for the first time this year, says polls

The general elections are due in 2019 while the state elections are going to happen in the coming months. According to a poll of strategists done by Reuters, the scenario for domestic stocks for 2019 has been lowered for the first time this year. The strategists expect the market to recoup its recent losses only once uncertainty around next year's elections fade.

Pressured by a steep sell-off in global equities along with dwindling credit supply, the main stock index, the BSE Sensex, has fallen about 10 per cent since hitting a life-high of 38,989.65 on August 29. October was its worst monthly decline since the financial crisis a decade ago.

With state elections slated over coming months and a general election scheduled for May, domestic shares could remain subdued until the results become clear, according to a November 13-26 poll of 50 strategists.

Yet even by the middle of next year the BSE Sensex is forecast to regain only about half its recent losses to trade at 37,000 from Tuesday's close of 35,513.14.

While it is expected to rise to a new record high of 39,400 by end of next year, thanks to strong corporate earnings, the strategists lowered 2019 predictions in the latest poll, the first downgrade in Reuters surveys this year. The August poll had a median forecast of 41,200 as the record-high.

Over 60 per cent of 26 common contributors from the previous poll cut end-2019 forecasts and two did not make any change. Only eight were more optimistic.

The less bullish forecasts for next year underscored anxiety over a range of factors including the elections, the rupee's sharp losses this year, capital outflows from emerging markets including India, and a tussle over policy between the Reserve Bank of India (RBI) and the government.

The rupee has lost about 10 per cent this year making it Asia's worst performing major currency.

The RBI board's decision on November 19 to ease liquidity conditions by giving banks more time to shore up capital and increase lending to small businesses, in addition to open market operations, has helped the rupee gain about 2 per cent since then.

"Keeping aside the political uncertainty, markets have already corrected significantly, recovery in corporate earnings and strong macro-economic factors will push the index further up as the dust will settle around the liquidity situation probably next year," Vachana Investments' Rudramurthy said.

STRETCHED VALUATIONS?

Over 80 per cent of 45 equity strategists who answered an extra question said company earnings growth has not yet peaked, though there are signs the pace will slow over the next year.

"The long wait on earnings growth is finally coming to an end, as they are expected to grow above 20 per cent in 2018 and 2019, though the expectations have been somewhat moderated in the second half of the year," said Kunal Kundu, India economist at Societe Generale.

Given many companies have missed profit estimates over the last four years and several have lowered their outlook for last quarter, a significant pickup in earnings growth is unlikely, some