A friend recently forwarded a message from a global market expert likening the ongoing Indian general election to the one in the United Kingdom in 1984.
While I had no issues with his identification of the winner and resultant market forecast, I found it a little disconcerting that election scenarios in a relatively small country with primarily just two parties was being compared to a huge and diverse country like ours with a federal structure, where regional parties often fight the national parties on an even keel on their own turf.
Since the season seems on, let us hazard guesses on the likely outcomes and their impact on the equity markets.
In the first scenario, the BJP wins an absolute majority by itself again.
In the second scenario, the BJP does not win an absolute majority but manages with the support of its NDA allies, independents and splinter groups to form the government, or even vice-versa.
In the third scenario, the BJP and its NDA allies, even together with Independents and splinter groups, fall short of the magical 272 tally, paving the way for a coalition government headed by a regional leader supported by the Congress and its UPA allies or vice-versa.
How will Indian bourses respond to each of these scenarios in the immediate aftermath?
The first scenario is the one that many influential market participants probably hope the most for, and could result in yet another rally quite like the pre-election rally. Not being one for forecasting market indices, I shall restrict my forecast to saying that the rally could be a fast and furious, albeit short one, as at some point, the need for a re-check of the fundamentals and valuations will surface.
The second scenario seems to be the one that influential market participants have factored in, and it would in all probability facilitate consolidation of the indices around the pre-result announcement level. The flip side here for the market could be that, notwithstanding a BJP-led government, there will be all the pulls and pressures of running a coalition government as the NDA allies and others that support the government will periodically demand their pound of flesh.
The third scenario clearly seems to be the one that influential market participants least want. However, that by itself cannot prevent it from happening, if it has to.
Historical evidence suggests that market sulks don’t last long and if what happened post the surprise win of the UPA in 2004 is any indication, the grief may be short-lived. Yet, the likeliest impact will be a panic sell-off to the pre-election rally levels.
Elections come and go and once the dust settles down, it is back to business as usual. I am certainly more concerned about the recent spike in crude oil prices and the likely impact of the US-China trade war. After all, amidst a dust storm of the electoral variety, one must not miss the trees for the woods.
As for long term, we still remain insulated by a decision of the late former Prime Minster PV Narasimha Rao in the early 1990s, which launched the Indian economic juggernaut.
Ashok Kumar heads LKW-India. He can be reached at ceolotus@hotmail.com