The only thing predictable about the Indias forthcoming general elections is their unpredictability.
This is what is going to keep the domestic equity market choppy in the days ahead. Besides, a falling rupee, rising crude oil prices and unabated outflow by foreign institutional investors are only going to add to the woes.
The BSE Sensex traded nearly 200 points higher at 35,853 on Monday, but was nearly 2 per cent down from the all-time high level it had hit on January 29.
The BSE Midcap and Smallcap indices are down up to 21 per cent from their respective all-time highs scaled in January-end.
Indian voters will go to the polls in less than a years time to elect the next Parliament. While incumbent Prime Minister Narendra Modi is favoured to make a comeback, analysts say it will not be a cakewalk and at best he would return in a much smaller mandate.
Japanese brokerage Nomura said several political developments have raised investor concerns about the chances of the incumbent government coming back to power in 2019.
These include realignment among opposition parties to form a third front against the Bharatiya Janata Party (BJP) and BJPs own allies threatening to leave the National Democratic Alliance (NDA). The Lok Sabha (general) elections due in 2019 are likely to influence market sentiment till the middle of 2019. Should it results in defeat of the BJP-led alliance and advent of an unstable coalition in power, it will hit the domestic stock market hard.
Should you worry?
Market experts believe election results have a material impact on stock markets but over a long period, they only have limited impact on investor sentiment.
Key indices hit upper circuits when the UPA won in May 2009. That time market participants were upbeat, as a bigger mandate for the Congress party had virtually eliminated the interference by Left and other regional parties and less number of allies meant a more stable government. The rally continued for next 18 months before correction set in.
Similarly, the huge mandate for the Modi-led BJP in 2014 gave the stock market a big high, which lasted for several months.
“Every election year, there is nervousness in the stock market. More than a particular political party, the market mostly dread coalition and minority government. That keeps people generally edgy ahead of elections. Otherwise, elections do not have any direct impact on the market in the long term. Market performance depends on corporate earnings and the broader economy in the long term,” said Rajeev Thakkar, CIO, PPFAS Mutual Fund.
Waqar Naqvi, CEO, Taurus Mutual Fund, said the Indian growth story is strong and the economy is robust not only in terms of the fundamentals but also in terms of a strong and qualitative manpower across the board, including at the senior levels of bureaucracy. India will keep growing and its markets will reflect the same growth irrespective of who forms the government. However, it is true that if a single party wins majority or if a strong coalition wins majority, then the market will become bullish immediately. Even if a coalition comes to power, including a weak coalition, the market should do well after some kneejerk reaction.”
Nomuras bottom-up assessment of seat counts and trends in vote shares suggested a wide range of 181-308 seats for the BJP/NDA, reflecting the current political uncertainty.
“As a base case, BJP/NDA is likely to emerge as the single largest bloc and would have the best shot at forming the next government,” the Japanese brokerage said in a report.
Raghvendra Nath, MD, Ladderup Wealth Management, said the India story is going to remain strong for next 4-5 years, no matter which party comes to power.
“There could be short-term volatility depending on the election results, but things would go back to normal where corporate fundamentals would govern share prices,” Nath said.
Ahead of elections, the thrust is likely to be on expediting implementation of various schemes targeted at uplifting the rural and poorer sections of society and at addressing agricultural distress.
The government on July 4 raised support prices for summer-grown crops, such as rice and cotton, by the most since Modi came to power in 2014, as he looks to woo millions of poor farmers ahead of key state elections and next years general election.
“Equity investors need not panic ahead of the elections. With inflation showing an upward trend, and interest rates rising, those who are invested in equity should stay put. The need is to remain invested in quality stocks. At best, returns may be a bit delayed, but there is a pot of gold at the end of the rainbow,” said Naqvi.
The hike in minimum support prices (MSP) is set to bump up the Reserve Bank of Indias already heightened inflation forecast and may lead to higher interest rates at the next monetary policy review on August 1, and possibly another rate hike before the year ends.
Are there investment options other than equity that will work for next 2-3 years? Naqvi said with inflation creeping upward and interest rates likely to rise, long-term debt does not appear to be a good idea at this point.
He said real estate has come off from its highs hit 4-5 years back and has not shown signs of giving noticeable returns in the near future.
Gold may go up but will require geopolitical tensions or a rapid increase in crude prices to move up, which may not last. Hence given the way the game is stacked, equity appears to be the best bet for the next couple of years, post which some other asset classes may become attractive.
Other market experts say there is no need to change the investing strategy at ths point.
Dinesh Rohira, Founder and CEO, 5nance.com, said given the importance of the event for the market as well as for individual investors, the market is likely to discount it much ahead of the polls and before the outcome is known.
“Since the market opinion on election outcome is divided, volatility is expected to rise in interim. On a broad level, this event would create short-term volatility in the market but may not have any bearing on long-term investment. Existing long-term investment backed by fundamental attributes doesnt really demand any shift in strategy.”