There is something rather strange happening in the political conversations in the country right now. I recently met with some industrialists and asked how the market was faring. All of them had one answer- market is in a slump.
Then I asked them if it is due to the policy changes effected by the central government? They all answered in affirmative.
My next question was if this government then needs to change?
There was a discernible no from almost everyone present. Despite the slump they were referring to, they were hopeful of a turnaround. And what was the hope based on? The policy changes being structural and not eyewash or populist in nature. This is a relatively new phenomenon in the Indian political scenario. Our political discussions make us loyal to one party only and support all of its actions and ideologies, whether all of them align with ours or not. But this time it is different.
Almost every businessman I meet criticizes the disruption caused by demonetization, but is hopeful that its benefits will be here for them to reap in the longer run. Almost every middle class person who is disappointed with not getting any new tax cuts is hopeful that this is finally for the betterment and is putting end to populist policy measures. With Karnataka elections just gone by, and 2019 already in the distant horizon, the economic markets are in focus too. 2014 was the year where equity markets showed us how they celebrate a stable and full majority government.
The Karnataka Cliffhanger
There is a lot of focus on every election now- the anticipation levels exceeding those of a nail biting IPL finale. The Karnataka elections were the talk of town in every city in India. It didn’t matter whether you reside in Punjabi neighborhood of New Delhi or in a faraway north eastern state- everyone was glued to news channels or checking their phones for latest updates about the high voltage elections and the aftermath that followed. And not just people as audiences, the stock market participated in the high powered drama as well. The market showed a lot of promise as news of BJP increasing the vote tally came into picture. But the cliffhanger part where BJP just missed the halfway mark wiped off those very gains.
The following is how markets reacted to the minute by minute updates of whatever was transpiring in Karnataka
- Market opened on a high amidst reports of a comfortable majority for BJP
- Sensex rose over 400 points in early trade; Nifty surged over 120 points
- As the news of BJP missing the government forming mark emerged, markets made a sharp U-turn and wiped off the gains of early trade.
What next for equity investors after Karnataka?
The road is a bit bumpy for equity investors after Karnataka. While BJP has secured an astounding increase in number of seats in Karnataka elections, its failure to form a government has had a negative impact.
The first question that arises here is, why do markets love the current government? There are a lot of factors, few of which are listed below
- Markets prefer a stable government
Markets know that a stable government is a prerequisite for economic growth to take its pace- and that’s why it prefers a single majority BJP rather than an unbalanced and shaky alliance of other parties. A stable political environment also calls for better foreign inflow, causing a boost to the economy.
- In D-street, mandate to BJP means mandate to economic reforms
The ruling government in the center has a reputation for laying ground breaking economic reforms. While the effects of these reforms and subsequent implementation can be argued upon, there’s no denying that the reforms are structural in nature. And any structural reform in an economy as large and fragmented as India- is going to hurt initially.
So a mandate to the ruling government will ensure that the discomforts of the policy reforms have not dissuaded the people and they are ready to embrace them for a long term benefit. And this needs no testament that markets love far sighted, hard reforms.
- The 2014 HALO
2014 election results proved to be bountiful for equity investors- BJP coming to power rallied stocks like never before. And during the four year term, market has been exhibiting bull tendencies even while going down steeply at times. So it becomes quite simple why BJP is the choice for D-street.
- Policy reforms being lauded by world agencies
Almost every economic agency and rating agency that has commented or made observations about India’s current economic scenario- has lauded the policy reforms undertaken by the current government- and many are hopeful on these being continued if the government gets a fresh mandate. And the agencies being talked about here are institutions like World Bank itself.
- A hold on populist measures
The current government has proved very bold in two arenas- implementing unpopular reforms- and not implementing populist policy measures. The freebies and incessant spending just for populist targets dampen the market spirit. They also dissuade external ratings on account of them being unsound business decisions. The current government has not succumbed to this propensity and that is definitely a reason to hope for this regime to continue.
- Drop in institutional corruption
India has been plagued in the past with instances of institutional corruption at various levels of the government. It not only makes the Indian market less attractive for FDI, but also tends to slow down the domestic movement in the markets. Tight policy changes and strict monitoring of government projects allocation has brought a sense of confidence in the markets. The once necessary evil of corruption is finally in the process of being nipped- even if it is just a beginning.
What about 2019?
After the Karnataka elections, many are wondering where to place their bets for 2019 elections. As we saw in Karnataka results, investors who kept big positions as BJP was rising in vote tally; but restricted the same positions as a clear majority became a feeble possibility.
As far as 2019 is concerned, equity investors don’t have much to worry. Market has undergone some corrections in the recent past, and a favorable election result for the BJP will ring good news for the stocks as well. There is a growing murmur about a grand coalition, but it won’t affect BJP as much as is being hyped. There are many reasons and observations that justify this conclusion-
- BJP didn’t lose in Karnataka, rather it won the maximum number of seats
No matter how much chest thumping is done by the opposition, the hard fact remains that BJP bagged the highest number of seats in the Karnataka elections, far more than any other party. This means that more public accepted BJP than the incumbent Congress in a southern state which was considered to be a Congress bastion not long ago.
- Congress is present in only two more states, posing a much lesser threat for BJP
Congress’ presence is now very limited, and Rahul Gandhi’s acceptance as a national leader fall much beind than that of Narendra Modi.
- Just like markets, people also prefer a stable government
The so called grand coalition is too much of fractured concepts, with many frailties and contingencies. It is yet to see if the coalition sees the light of the day to actually stand in the 2019 elections.
So bottom line, the prospects look fine for the equity investor, but all information has to be taken with a pinch of salt. The market often reacts with knee jerk responses, which should not guide the decisions of investors. Knowing India’s socio-political scenario, one has to assume and be ready for the contingency that democracy can spring surprises.