To say that the markets are disappointed by the results of the five Assembly elections will be an understatement. According to equity strategists, the best case scenario would have been a Samajwadi Party government in Uttar Pradesh (UP), supported by the Congress. But with the Congress being routed in UP, Goa and Punjab, all hopes of bold reforms have been dashed.
Most brokerages have lengthy reports on the outcome of the five Assembly elections and the potential impact on the markets. Broadly, the assumption is that reforms will take a backseat with the Congress faring poorly. “We think the results will not provide the political space for the government or the confidence to carry through unpopular reforms,” says Vishal Vaibhav of Goldman Sachs in his report. “We think the best that can be hoped for is muddle-through policies by the government.” The brokerage expects limited fiscal consolidation and some movement on infrastructure. However, the government is not expected to implement the tougher structural reforms, which would include foreign direct investment (FDI) in multi-brand retail, the Land Acquisition Bill, Lok Pal Bill, and pension and insurance reforms.
The markets are now bracing for more populist measures, which may put the market rally to risk. Citi says consensus would suggest the Congress will get more cautious — effectively hand out more sops resulting in further fiscal slippages and move further away from reform. However, this need not necessarily be the case, the Congress could well be much more forceful with reform, given that back pedalling on these does not seem to be paying electoral dividends for now. However, Citi’s analysts think the odds favour more defensive rather than offensive economic management from the government.
Anlaysts believe the one thing apparent from the election results is that the electorate is voting for better governance. Analysts are hoping the United Progressive Alliance (UPA) government will take this into account in the run-up to the 2014 general elections. As UBS Investment Research says, “Markets may react adversely to these results near-term, but we remain positive on India markets based on improved governance (not major reforms) post elections, monetary easing (not stimulus), earnings cut cycle bottoming out and supportive valuations.”
So, what does this mean for the market? Clearly, markets have been rising on the anticipation that a stronger Congress would be able to revive the economy. But this looks unlikely now. If expected reforms stall, then the defensives will come into focus again and the cyclicals may take a backseat yet again.