Sensex, Nifty: Why BJP's Delhi election win could not lift stock market today

Concerns over tariff war and market valuations overshadowed BJP's strong election win in Delhi, as benchmark stock indices Sensex and Nifty saw muted trading in Monday's session. The US President Donald Trump has proposed imposing of 25 per cent tariffs on all steel and aluminum imports to the US, which pushed dollar higher and intensified fears of a likely rise in US inflation. This could impact the US Fed policy decisions.

"The Delhi election results, particularly the emphatic nature of the BJP win, though positive from the market perspective, are unlikely to trigger a sustained rally in the market. With the dollar index above 108 and the 10-year US bond yield above 4.4 per cent, FIIs will continue to sell the rally, restricting any potential upside," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

On Monday, the BSE Sensex stood at 77,635.30, down 224.89 points or 0.29 per cent. Nifty stood at 23,495.35, down 64.60 points or 0.27 per cent. The selling was led by index heavyweights such as HDFC Bank, Reliance Industries, Infosys.

Metals stocks were hit hard. Vedanta was the worst index performer, plunging 4.47 per cent to Rs 435.20. SAIL slipped 4.42 per cent to Rs 105.60. Tata Steel, JSW Steel and NALCO declined 3-3.7 per cent. Hindalco Industries and Jindal Steel were down 2.54 per cent and 2.32 per cent, respectively.

Stock market gurus believe valuations in India are rich and the market needs fundamental triggers like indications on GDP growth and earnings rebound. Until then, the market is likely to move only in a range. Investors should stick to fairly-valued high quality largecaps, Vijayakumar said.

Valuation guru and the finance professor from New York University, Aswath Damodaran, in his latest blog said India is now the most expensive equity market in the world, and “no amount of handwaving” can justify its current valuation levels. "The Delhi state election results should be an incremental positive for the stock market, as it allays any residual concerns over stability and smooth functioning of the coalition government at the Centre," MOFSL said in its latest note.

The brokerage believes that the market will take the Delhi verdict positively, as it provides further impetus to the policy momentum and helps allay residual concerns, if any, over the stability of the coalition government at the Center.

"With the Budget now behind and the RBI providing monetary relief, this verdict will lift sentiment at the margin. However, attention will now shift back to earnings, corporate guidance and global macros amid turbulence in global markets on US President Donald Trump’s trade policies," MOFSL said.

The brokerage recommended a largecap heavy-portfolio owing to valuation differentials against smallcaps and midscaps (SMIDs).

It said Nifty50 is trading at 19.8 times, 4 per cent below its LPA, on a 12-month forward basis, while the Nifty Midcap 100 is at 30 times -- 50 per cent premium to the Nifty50. In the case of Nifty Smallcap 100, the index at 22 times is trading 13 per cent premium over the Nifty50.

"Thus, valuations remain elevated for broader markets, while they are slightly below the average for the Nifty50. We remain cautious on sectors where valuations have substantially exceeded past earnings growth," MOFSL said.