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Though the outcome of the general elections will offer a short-term boost to the market, a sustained rally will be determined by the economic data, according to a JP Morgan Asset Management report.
"Although investors are eagerly awaiting the results of the general elections as a catalyst to boost market confidence, we believe economy is a more important driver in medium-term," the report said today.
The market has closed FY14 with a 19 per cent rally, most of which was gained in the last month of the fiscal.
It also said the market rally will depend on domestic investors and not the present level of FII-driven rally.
After the 2013 summer troubles, RBI's determined policy response has rebuilt market confidence, and this in turn has facilitated a solid rebound in local equities, it said.
While 2013 was a very tough year for domestic equities, especially because the 12.9 per cent fall of the rupee, stabilisation of the macro economy and policy response have provided the market a degree of resilience. This is reflected in the 8.2 per cent rise in MSCI India in 1Q of 2014, compared with a -0.4 per cent drop in MSCI Emerging Market Index in US dollar terms.
Perceptions of political tailwinds after the general elections are also providing additional support to the equities, the report said.
Various opinion polls have indicated that the opposition BJP, led by Narendra Modi, is in a strong position to become the largest party, able to lead a new NDA-coalition, the report said.
A more proactive reform theme may resonate with investor in the short term. This is particularly relevant for domestic investors, since they have shunned equities in recent years, partly due to the high nominal yields offered by local bonds.
However, new economic reforms are likely to be a multi-year programme, and we argue that economic growth momentum will take over as the driving force of the stock market once the post-election excitement subsides, the report said.