Conventionally one would have expected higher volatility,
jitteriness and weakness in the market given the political impropriety leading
to legislative impasse and administrative inaction. However, the market has
brushed aside most concerns and moved on.
We are however not surprised by the market’s reaction to the
political events. We firmly believe that market is not indifferent to the
political event and the collective wisdom has assimilated the political environment
well. We believe that market is finding the political events constructive and
medium to long term positive.
Insofar as the up move is concerned, it has two major drivers –
(a) global positive sentiment towards risk assets, especially equity, and consequent
larger FII participation and (b) bottoming of macroeconomic fundamentals, in
particular inflation, rates and investment demand.
Domestic politics has little influence on global markets and
flows. Macro fundamentals do get impacted by the efficacy or otherwise of the
political establishment; and here in our view the market is deriving comfort
from the recent events. In our view, the Congress party has strengthened its
position in past few months and market is comfortable with that. For example
consider the following:
(a)
We had highlighted in one of our earlier
reports that in our view the Congress party has well defined strategy and
it is executing it well (see margin note). The recent instance of two ministers
resigning on impropriety charges is yet another instance of impeccable
execution of this strategy. The Congress party has emerged stronger after each
such episode in past one year.
The Congress Party strategy, in
our view:
(1) Divert the
popular debate away from corruption and non-governance to economic (price rise)
and social (food and women security) issues.
(2) Weakening NDA
and work on reconstitution of UPA.
(3) Present a
transformed youth looking party image to people.
(4) Distance itself
from the current government and all the impropriety charges it is facing.
(5) Keep the
government alive till May 2014, and demonstrate Congress’s ability to run
governments in adverse conditions and wait for the economic conditions to
improve a little.
(b)
By electing Karnataka CM through secret ballot,
the party has given a strong message of its readiness to accept greater intra
party democracy, thus debunking a key plank of opposition.
(c)
The party has successfully created a projection
in media that incumbent FM Chidambaram is a likely PM candidate, thus diverting
the focus from Rahul Gandhi. Our discussion with many businessmen and
industrialist suggest that at this point in time many would prefer PC over Modi
since they believe PC will try to improve the current system and hence execution
will improve faster; whereas Modi would like to first change the system and
that might adversely impact the execution part in the short term.
In view of this we suggest the following strategy:
(i)
Avoid shorting the market. Though continue reducing/rationalizing
equity positions at every rise. Global liquidity will likely remain
comfortable, and PC will do better things to strengthen his position – do
not position for a collapse in market.
(ii)
The deterrent to corruption has also risen. Post
Coalgate bashing, CBI would certainly try to redeem its pride. In our view, we
might see many Bansal/Singla like episodes in next six months. That might
create large bouts of volatility and provide better entry points – buy
on days when sky appears falling apart.
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