With the elections on, one can clearly see some interesting stock price movements. To me, it looks like the market punters are anticipating a government that is led by Narendra Modi. Gujarat-based counters are on a tear. Not just private, but also the state PSUs of Gujarat. There is extreme bullishness built around this expectation. To put things in perspective, let us look at the likely outcomes, which are largely based on opinion polls in public doman:
A) A stable government led by Narendra Modi without any crutches for support; or
B) A government led by Narendra Modi, but with crutches — significant portfolios to other players; or
C) A third front that forms the government with the BJP and the Congress in the Opposition; or
D) A hung Parliament, with no one able to form the government leading to an impasse ; or
E) The return of UPA.
I had previously talked about the weakness in the economy, the problems of the fiscal deficit and the lack of growth engines. That is not going to change whatever happens. The outside world perception of stability or otherwise would have a big impact on the immediate state of the economy.
Should the outcome be option A, perhaps it would be the most favourable for the markets and economy in the near-term? How quickly is the new regime able to bring about and demonstrate its firmness in bringing stable policy framework would hold the key to revival of confidence and inflow of FDI/FII.
There would be immediate strengthening of the rupee and a sharp up move in the stock markets based purely on expectations.
Outcome B, will be negative to neutral. There could be an immediate negative feel followed by a wait-and-watch period. The main thing would be an assessment on the longevity as well as the nature of the crutch that will enable stable to free market policy making. If it turns out to be a survival mode government with compromises on every policy front, then one can expect a sharp deterioration on all fronts. Populism will again hold sway and decision making will be noticeable by its absence. Not a nice outcome for the economy.
Option C will be immediately seen as a disaster and the consequences would be surely worse than outcome B. Even if it turns out to be like UPA I or
II, the economy is likely to deteriorate. With no clear direction, the economy will be at the mercy of the elements. This kind of a government may not last a full term. That could perhaps be the best thing that can be visualised of such a government.
Option D is everyone’s nightmare, with the un-certainties being pushed to another election. It would mean “President’s rule”. This would mean that the President would have to appoint a Prime Minister and both of them would appoint ministers. This is a scary outcome and again, it would mean a near term disaster for the economy and the markets.
Take each of the outcomes and see what it does to the following;
i) Exchange rates: Impact due to inflow/outflow of FDI or FII;
ii) Inflation: Impacted by lack of continuity and exchange rate;
iii) Investment climate: Confidence or lack of it depending on the outcome; and
iv) Drift in administration vis a vis resultant fiscal situation.
Once we make a grid of the likely outcomes and the four key factors, we can see that only the first outcome (outcome A) seems to be favourable and
can help the economy recover.
I am not endorsing any leader or party and one can easily substitute the name with any other. Anyone with stability — whether it be the BJP or the Congress in absolute command — is the only positive for the economy. The air around us does not seem to promise this. So, as an investor, I am circumspect. A high level of optimism is already in the price. Now is the time to cash some chips and wait for better buying opportunities.
(The writer is an independent analyst and can be contacted at balakrishnanr @gmail.com)
