State elections results will provide fodder to the markets for a few days

Election results will keep market participants glued to the political landscape for the next few days - probably the most expensive elections from the point of the view of public health

India is currently in midst of a tsunami of Covid cases with daily numbers close to 4 lakh, which is 4x the peak of the first wave seen in 2020, and we don’t seem to be anywhere close to a peak yet. There are strong chances that there will be lockdown in more regions in May as the numbers climb. So far, the stock markets are blissfully ignoring the humanitarian crisis, assuming that this is a passing phase and all will be well in the next couple of months once the vaccination drive picks up. However, the pipeline for vaccine supplies is still uncertain. Unfortunately, the emotional drain would be much deeper and the fear of the third Covid wave will limit economic activities, despite the gradual opening up over a period of time. 

The easy monetary policy by the major central bankers have ensured liquidity flows to performing emerging markets (EMs) and India has been among the top beneficiaries. The last 12 months also witnessed a gush of liquidity from more than a crore ‘Robinhood Investors’ who have had a profitable run, and hope are high that this will continue much longer. The unquestioning liquidity provides a ‘high’ which ignores all the red flags, instead, looks at the silver linings turning into a self-fulfilling prophecy. 

 

The earnings season has been fairly good so far as the second Covid wave has not caused much disruption till March 2021. The immediate data point over the weekend would be the election outcome in the four states of West Bengal, Assam, Kerala and Tamil Nadu in addition to the union territory of Puducherry. 

Among all the States, the most important outcome from the stock markets perspective would be West Bengal, which saw the heavyweights from both Bharatiya Janata Party (BJP) as well as Trinamool Congress (TMC) fighting tooth & nail. It turned out to be the most acrimonious in recent times, especially in the backdrop of the raging second wave of Covid. 

The exit polls indicate a close fight and probably a hung assembly in West Bengal, whereas Tamil Nadu may go the Dravida Munnetra Kazhagam (DMK), Kerala would remain with Left Democratic Front (LDF), Assam remains with the National Democratic Alliance (NDA) and Puducherry would be getting into the NDA fold. 

In West Bengal, a win for the BJP, whether a slim majority or a post-election arrangement, could be a sentiment booster for the next few days, whereas if TMC is able to hold the fort, albeit with a small margin. The markets may not take it too negatively, as the silver lining would the major in-roads made by BJP in comparison to the last assembly election in the state. A rout for BJP, which is not expected, could be a mood-spoiler.

The State elections results will provide the fodder for the markets for a few days, after which, other data points and news flow will continue to drive the sentiment. It needs to be seen as to how long the markets would ignore the pandemic numbers and its effect on the economy. There may not be a huge demand pull post the pandemic like last year, and Indians may end up increasing their savings for another rainy day. With cumulative numbers expected to cross 2 crore soon, the pain will not be limited to the bottom of the pyramid but across various strata, which could slow down an economic recovery. The growth forecasts for fiscal 2021-22 (FY22) could see a substantial downward revision and analysts may revise the earnings estimates starting with Q1FY22. 

Only time will tell whether the pandemic finally takes on toll on the stock markets or not. However, election results will keep the market participants glued to the political landscape for the next few days – probably the most expensive elections from the point of the view of public health. 

Ambareesh Baliga is an independent market analyst. Views are his own