Verdict 2024: Market Implications
An analysis of the past 30 years of market trends provides no evidence to suggest that elections, the form of government, or the strength of a particular party in the parliament impacts the market performance significantly. However, it is common to see higher volatility during or around elections.
Insofar as the fear of a multi-party coalition or a fractured mandate is concerned, I believe, the investors should be relieved by the prospects of a true coalition coming to power. Because, in the post-independence era, the best periods for the Indian economy have been those when a “coalition” government was in power.
It is however important to note that by “coalition” I do not mean just a multi-party government. In my view, coalition government means where people with diverging socio-economic policies jointly participate in a government. Empirical evidence suggests that such coalition governments in India have agreed on a common minimum agenda and focused on executing the same, avoiding conflicts and logjams.
The first cabinet of India post-independence had R. K. Shanmukham Shetty (Finance), Shyama Prasad Mukherjee (Industries) B. R. Ambedkar (Law) and Jagjiwan Ram (Labor). These people did not subscribe to the Nehruvian socio-economic agenda, but we got a robust socio-economic framework. The singular governments of Nehru (post BRA, RML, SPM - 1956 and 1961), Indira Gandhi (1971, 1980), Rajiv Gandhi (1984) are not known for good governance or transformative socio-economic reforms.
Morarji Desai (1977 – FERA dilution, Gandhian socialism), V. P. Singh (1989 – tax reforms, social justice), Chandershekhar (1990 – disinvestment, fiscal reforms), PV Narsingh Rao (1991 - liberalization, delicensing), Devegoda/IK Gujaral (1996 – dream budget), Vajpayee (1998, 1999 – divestment, infra development) and Manmohan Singh (2004 – RTI, RTE, UIDAI, Right to Food, Right to Healthcare, MNREGA, Civil Nuclear Deal, FDI in retail & pension etc.) were all coalition governments. These governments are all remembered for socio-economic reforms causing fundamental changes in the socio-economic milieu of the country. None of these governments is remembered for non-governance, anti-market policies or anti-business stance.
The incumbent government has taken three major initiatives in the past 10 years, that have helped Indian equity markets:
(a) Abolition of 86% of currency notes in circulation in November 2016. This measure is popularly believed to have benefitted the large organized sector businesses (mostly listed) at the cost of smaller and marginal businesses (mostly unlisted).
(b) Implementation of GST from July 2017. This is also popularly believed to have enhanced the competitiveness of large businesses (mostly listed) at the cost of smaller unorganized and non-compliant businesses.
(c) Promoting local manufacturing through production-linked incentive (PLI) schemes for a variety of sectors.
However, the gains from these initiatives have not been true to the expectations due to the unpredictability that crept into the policy framework and sub-optimal execution.
Thus, in my view, the policy risks in India from the political side are low and not to be much bothered about. The key risk is execution and this risk has little to do with the form and constitution of the government of the day.
Insofar as the market performance during coalition or minority governments is concerned, there is no evidence that markets have performed poorly due to the form or constitution of government.
2024: Market after elections
Regardless of election results, the markets may remain volatile and directionless until a government is formed.
Bonds: The bond market will be guided by the full budget for FY25 that may be presented in the last week of July 2024. A significant violation of fiscal discipline, and disappointment in the inclusion of Indian bonds in global indices may lead to a sell-off. Else, we may see a stable bond market. A good monsoon, as forecasted by IMD and other agencies, may brighten the outlook on inflation, and a softer RBI monetary policy stance.
Equity: The corporate earnings for 4QFY24 have been below the consensus estimates. This has resulted in downgrades in FY25 and FY26 earnings forecasts. If the trend continues in 1QFY25, we may see further earnings downgrades and de-rating of the market in general.
A BJP victory, as widely expected, may extend the rally till mid-July. After that, the market direction would be determined by the budget proposals and earnings outlook.
In a less likely situation of an INDIA government, we may see a knee-jerk move downward that may get reversed in the next few weeks. After that, the market direction would be determined by budget proposals and earnings outlook. In this case, however, we may see a material sectoral rotation towards consumption, given the INDIA promise to afford significant cash in the hands of consumers.
In any case, the impact of election results may not last beyond July 2024. The strategy should therefore be to actively look for opportunities (to buy or sell) in case of any material rise or fall in prices on or after 4th June.
Also read
No comments:
Post a Comment