When economics borrows jargon from physics, the results can be ludicrous ("escape velocity of Jupiter" as applied to Dalit empowerment), or misleading (a "perfect vacuum" is way closer to perfection than a "perfect competition market").
Sometimes the analogies are useful. Momentum, for instance, is mass into velocity. It takes greater force to change the velocity of a massive object. It takes more money to reverse price trends in heavily-traded assets since financial momentum is price trend into volume.
Macroeconomic momentum would be gross domestic product (GDP) coupled to GDP growth trends. The larger the GDP, the more difficult it is to change the trend. An economy as large as India has lots of momentum. The United Progressive Alliance (UPA) has spent the better part of six quarters unsuccessfully trying to accelerate growth trends.
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Efforts to impart macroeconomic stability have been somewhat more successful. The rupee has stabilised, with significant accretion to reserves, thanks to massive inflows from foreign institutional investors (FIIs). Inflation, and associated expectations, has reduced, thanks to the Reserve Bank of India's policy stance.
The rating agencies have been threatening sovereign downgrades since the second half of 2012-13.
But they have held off, so far. Plan cuts have controlled the fiscal deficit. The current account deficit has drastically reduced. However, the twin deficits are still at objectively dangerous levels.
In the last six months, many infrastructure projects, which were stuck for years, have finally been cleared. But the investment cycle has not revived. This is partially because everyone is waiting for the results of the election.
But, as Credit Suisse (CS) points out in a report, it is also difficult for the central government to reverse the investment cycle. Only about one-fourth of infra projects were stuck due to issues the Centre could resolve. The rest are "constrained by over-capacity, (poor corporate) balance sheets, or state governments."
Among overseas institutions, which are mostly gung-ho about the prospects of a Modi-led government, CS has taken a contrarian stance. CS extrapolates that the pre-election rally will fizzle out, regardless of electoral outcomes, once investors realise that no central government can reboot investment cycles quickly. However, CS also says that a major crash is unlikely, even in the worst-case electoral outcome.
Credit Suisse analyses four possible political scenarios. In one, a Modi-led government comes to power with the Bharatiya Janata Party (BJP) requiring few allies. This will trigger a strong post-election bull run for two to three months. This rally will correct once investors realise rapid change is impossible.
In another scenario, Modi leads but the BJP needs multiple allies. Here, the market will be positive but less enthusiastic. In a third case, Modi is out but the BJP stitches together a government. In a fourth scenario, a Third Front comes in with external Congress support. In the third and fourth scenarios, the market will fall post-election.
It may be interesting to take a look at stock market trends in prior elections, from say, a month before polling starts through till the first three months of the new Lok Sabha - that is, a period of roughly five months.
Pre-election trading trends are consistent. In the past five general elections, there were positive returns in the month leading up to the start of polling. But returns for the five-month period don't show a consistent pattern. In 1996, the Nifty was up three per cent across five months. In 1998, the Nifty was down four per cent. In 1999, the Nifty was up 13 per cent, in 2004, it was down 12 per cent and in 2009, it was up an incredible 52 per cent.
In 1999 and 2009, the markets responded positively to assurances of stability, with the National Democratic Alliance and the UPA respectively, continuing in power. This time around, most market-watchers expect a rally on the assurance of change. Based on the stats, and my personal scepticism about electoral outcomes, there seems a good case for being long going into polling and being braced to reverse stance immediately on election results.
On the geopolitical front, events may be driven by the Russian annexation of the Crimea. The US and EU responses have been muted so far, with only some individuals sanctioned. If sanctions are imposed on Russia as a nation, Vladimir Putin might cut off gas supplies to the EU and Ukraine. Fears about this may push up oil and gas prices.
If such a scenario of sanctions and rising energy prices comes to pass, it would be awkward on multiple counts for India. India has friendly ties with Russia, from where it sources military gear. India is also a massive crude and gas importer. ONGC Videsh owns equity stakes in Russian energy assets like Sakhalin-I. It is hard to logically reconcile India's stance on Kashmir, Arunachal, and so on, vis-a-vis the Crimea.
Global financial markets are trying to decode Ms Yellen's first briefing as the US Fed Chairperson. It's clear the Fed will continue with the taper. Yellen hinted that it may also raise rates about six months after the taper ends, but it's not clear if she meant a hard-and-fast six months.
In the domestic primary market, the Central Public Sector Enterprises Exchange Traded Fund raised over Rs 4,000 crore. The CPSE ETF basket includes ONGC, GAIL, Coal India, Indian Oil, Oil India, Power Finance Corp, Rural Electrification Corp, Container Corp, Engineers India and Bharat Electronics. The Axis Bank stake sale through Specified Undertaking of the Unit Trust of India or Suuti also raised Rs 5,500 crore. Taken together, this should help comfortably meet the revised disinvestment target of Rs 16,000 crore.
Technically speaking, the Nifty is consolidating near record highs. Domestic institutions have sold heavily, while the FIIs have bought even more heavily. Retail investors have, by implication, also been sellers. Mapping buy-sell patterns to voter sentiment, this doesn't correlate very strongly with a Modi wave.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
