The markets were preparing for this sort of a mandate, though not as bad as what has emerged today. They were expecting Bharatiya Janata Party (BJP) to lose in Madhya Pradesh (MP) and a loss in Rajasthan was priced in nearly two months ago. Chhattisgarh, where it was supposed to be a close fight, BJP has lost badly. On the contrary, it has done better in MP compared to expectations.
Markets like certainty, continuity and a stable government – whether at the state level or the centre – as long as it remains business-friendly. In case of a new government, the actual picture comes out only after six months when they come up with new policies and people come to terms with it. In case the new government is able to assuage concerns, the markets gain ground. For instance, in 2014 there was a hope that Narendra Modi will form the next government, and these hopes were met with Modi securing a strong mandate. As a result, the pre-election rally continued post the actual election outcome as well.
It is quite possible that the markets may now start to factor in the rejuvenation of Congress and the possibility of a Congress win in the 2019 general elections. The Congress is now one up post these election results for sure.
The second possibility is that these state election results serve as a
wake-up call for the BJP to get its act together ahead of the elections in 2019. Though it is a bit late, they may try to course correct over the next four months in the run-up to the general elections. Either way, whether it is a BJP-led government or a Congress-led government, markets will look for stability and continuity of policies and reforms. In case of a BJP-led government, it could be on the lines of “Mahagathbandhan”, which essentially would be a weak government.
Depending on what we see over the next few months as regards political alignment ahead of the general elections, it will be a win-win situation for the markets. The markets were likely to correct majorly today, instead, they have staged a recovery. Had the mandate today been completely fractured, then the market’s reaction would have been completely different.
On the other hand, the markets have already reacted to the resignation of the Reserve Bank of India’s Governor, Urjit Patel. Though the development was unexpected, the markets will now look forward to who succeeds him. If the successor is a political crony, then the markets will react negatively.
As an investment strategy, it is a good time to enter the markets now. Markets are pricing in most negatives at the current juncture.
(As told to Puneet Wadhwa)
Ambareesh Baliga is an independent market analyst. Views expressed are his own.