Do it yourself

The stock price of Heritage Foods Limited, a milk processing company based in Andhra Pradesh, promoted by the family of N. Chandrababu Naidu (leader of Telugu Desham Party and CM of Andhra Pradesh) rose ~65% in the last week. The rise in stock price is apparently in response to the victory of Mr. Naidu’s party in Andhra Pradesh Assembly elections and the likelihood of it getting a pivotal role in the central government.

Stock prices of many PSEs and companies perceived to be close to victorious NDA partners witnessed heightened volatility and lost 8-15% value after election results.

What does this market behavior tell us?

Does it show that the market participants seriously believe that the elected Chief Minister of an Indian State, will “unduly” favor his family business? Or the working of a PSE depends on the number of MPs a ruling party (or coalition) has in the Parliament? Or the fate of a business in India materially depends on the closeness with the ruling party enjoyed by its promoters?

If any of this is even partially true, does it make sense to even consider investment in such a business? How the fund managers and advisors who swear in the names of Peter Lynch, Warren Buffet, Charlie Munger, could even think of investing (or advising investment) in such businesses?

Anyways, I would leave this debate for the market experts. As a tiny investor, my concern is limited to the point, whether I need to change my investment strategy or stay on my course, in light of the change in government at the center and two states (Andhra Pradesh and Odisha) since the elections are now over and a new government is taking shape.

Changed circumstance

Three notable political changes have occurred in India in the past week.

First, the NDA alliance has won the mandate to form the central government in India. The BJP, which had a strong majority in the outgoing parliament, has secured 240 (out of 543) seats in the 18^th Lok Sabha. After ten years, the BJP has fallen short of a simple majority in the Lok Sabha. It has now formed a government dependent on support of its NDA allies. Two key allies Janata Dal (United) led by the Bihar CM Nitish Kumar, and Telugu Desham Party (TDP), led by N. Chandrababu Naidu, the new CM of Andhra Pradesh.

Second, TDP led by Mr. Naidu has secured an absolute majority in the Andhra Pradesh Legislative Assembly, ousting the ruling YSRCP, led by Jaganmohan Reddy who was CM of the state for 10 years. This marks return of Mr. Naidu to power after two decades.

Third, Biju Janta Dal (BJD, led by Naveen Patnaik, lost power in Odisha state after 25years. The BJP secured a simple majority in the recently concluded assembly elections and is forming first ever government in the state on its own.

Market reaction

After an initial knee jerk reaction on the election result day, the markets have scaled new highs and look even more exuberant. On Friday, the Monetary Policy Committee of RBI decided to hold the policy rates unchanged with a 4:2 vote. Two members voted for rate cut and a change of policy stance from “withdrawal of accommodation” to “neutral”. This is also adding to the market buoyancy.

Investment strategy implication

I do not see any reason to change my investment strategy in light of the evolving political scenario. As stated earlier (see here), “I believe that in India economic policies, and therefore financial markets, are politics agnostic. I do not see the outcome of general elections impacting the Indian economy in any significant manner. The economic policy of India is still a work in progress. all governments in India in the past 40 years have made incremental improvements in the policy framework to make it congruent with the scale of economic development and changes in India's position in the global economic and strategic order.”

However, I do expect some positive developments for the economy, and therefore markets. In my view, for example—

·         The decision making at the central government level may improve materially with a stronger consultative and the decision-making process. Decisions like demonetization, abrogation of article 370 and CAA etc. had added elements of unpredictability and disruptiveness to the policy making paradigm in the past ten years. The need for a wider consultation for important decisions could eliminate these elements. On the flip side there could be some delays in decision making and market volatility may increase in cases where there is no agreement between the alliance partners.

·         In Andhra Pradesh, the work on the abandoned new Capital (Amravati) might start again. This may provide significant impetus to investment in the state.

·         The government may focus on affording more cash in the hands of the poor, especially rural poor. This may provide good support to the rural consumption, which is showing some green shoots.

·         The policy support to private capex (e.g., through PLI scheme) may continue and even get enhanced.

·         Overall, the growth may become more inclusive.

My strategy is premised on the assumption that after the final budget (July 2024) the markets shall be guided by the earnings, macro conditions, and global developments, rather than the outcome of elections. For now, I do not see any reason to change that premise.