Moneycontrol
Mar 20, 2017 08:16 PM IST | Source: Moneycontrol.com

COMMENT: Election results and stock markets: This too shall pass!

If past experience is any guide, exit polls are at best a good indicator of the trend. Hence, if we follow the trend on UP, it wouldn‘t be an overestimation to expect that BJP might emerge as a single largest party. Even if it doesn‘t cross the 50 percent seat mark, such an outcome is unlikely to rattle the markets beyond a day.

COMMENT: Election results and stock markets: This too shall pass!

Madhuchanda Dey

Moneycontrol Research

Multi-stage assembly elections in five Indian states – Uttar Pradesh (UP), Punjab, Uttarakhand, Goa, and Manipur ended on Wednesday. Markets are eagerly awaiting the results to be declared on March 11 and the exit polls have only whetted their appetite for the actual numbers.

The investor community by and large has been quite positive on quite a few big, bold and fundamental reforms have happened in India. The subsidy reform and anti-corruption drive have struck the right chord with investors. While the government is viewed as a strong and reformist one, the Street has largely reconciled with the reality that these are fundamental reforms and it will take time for the results to manifest, and Mr Modi needs another term as Prime Minister to carry forward the work, else all of it could be unwound quite quickly. Hence, in that context, the UP election results assume importance as the contest is seen as a midterm referendum on Modi’s policies. The five states put together account for 20 percent of Lok Sabha seats.

What’s the expectation?

The exit polls predict significant gains for BJP in UP and formation of government can’t be ruled out. Most polls suggest that BJP will defeat the incumbents in the state of Uttarakhand. In Goa, several polls expect the BJP to emerge as the largest party, but differ on whether it can win a majority of seats. The forecast for Punjab is clearly a defeat for the ruling NDA coalition and a close contest between Congress and AAP. In Manipur, the BJP looks like having an edge.

This should be music to the ears of the markets. However, if past experience is any guide, exit polls are at best a good indicator of the trend. Hence, if we follow the trend on UP, it wouldn’t be an overestimation to expect that BJP might emerge as a single largest party. Even if it doesn’t cross the 50 percent seat mark, such an outcome is unlikely to rattle the markets beyond a day.

Suppose the exit polls go completely wrong for UP. The worst outcome of the election for the markets would be if BJP emerges as the second-largest party. The markets fear that such an outcome could embolden and unify the opposition, and could, to an extent, increase the possibility of more populist polices in the run-up to the 2019 general election.

Memory is short-lived

Markets have witnessed accurate and not-so-accurate exit polls in the past. However, in each of these occasions, the ultimate reaction of the markets hasn’t been too dissimilar.

Markets witnessed similar high decibel assembly elections in 2015 as well. The first one was the Delhi Assembly Election in February 2015 that saw a landslide victory for AAP, the upstart challenger, much to the BJP’s embarrassment. The result was unexpected as the exit polls predicted a close call. The markets digested the result with minor hiccups with the index barely remembering the outcome for three trading sessions.

The Bihar assembly election that was held in November 2015 (almost one and a half years after the formation of the NDA government at the Centre) was also viewed as a verdict on the Government’s initial performance and got disproportionate attention. Here again, the exit poll was a close call between the challenger Mahagatbandhan and NDA, and the final result was clearly a disappointment for the BJP (with 58 seats) as they bagged lower seats than even the most pessimistic polls had predicted.

Markets opened 2.1 percent lower after the result, but staged a smart intra-day recovery and lost 0.5 percent on the first trading day post-election. While the Index gyrated for couple of days more, the event, on expected lines, was forgotten beyond two trading sessions. With the fundamental interest in India at a decent high, any correction will be bought by smart money waiting on the sidelines. So this too shall pass!
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