See flight to safe havens around elections: Alchemy Cap

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Q: For all those who say what election and why does it matter, why do elections affect markets?

Vaidyanathan: Elections at a larger level are important because the government is arguably the biggest stakeholder in the economy from a revenue, spending, and investment standpoint. So, who runs the government is an important directional thing. Secondly, we are at the cusp of a number of things so it is important for the government to determine what policy initiatives you set in place to extricate the economy out of a potential slowdown. A government can do a lot on that front. So, at a very macro level, government is the larger stakeholder, it holds all the pedals, gears to drive policy measures. I think that is the reason why markets give exaggerated amount of importance to elections.

Q: Is there an umbilical cord between elections and markets per se or is this sort of like a parallel stream where there is politics and that keeps running along with the markets and the market keeps reacting to political developments not necessarily the election event itself?

Bhattacharya: The markets always kept guessing what kind of government is in place whether it is a stable government or not and what kind of policies will come out of that. For example in the Indian economy, infrastructure is a big issue. Even how you make sure that investment in education takes place at a certain pace is key because that will determine the economic potential of the country, economy in the next five-ten years.

So, naturally market participants take clues from the way the economy grows or doesn't grow. Market participants are always concerned about what kind of government is in place. Elections are very critical, so market men look at whatever outcome elections bring out closely.

Q: There is one school of thought which says that usually nine times out of ten there has been a free election rally. But if you were to run through the stats even for a one-month performance, the variance is quite large. On one event you have a 12% pre-election rally and then you go in absolutely flat as low as 0.10% that is what got thrown up for one of those years. Is there a big correlation between price performance and elections as well?

Vaidyanathan: I don't think this rally in Indian equities today can be attributed to pre-election rallies. But if you look back and I have watched elections sitting in the market since 1991, I think the real pre-elections moves have happened in 1999 and 2004. Calendar year 2004 would arguably be the biggest case study of election related rally in the market though there was an emerging market event around that.

In India, elections consist of two parts. The actual election is the minor event, the government formation moves that happen post elections, pre-swearing in, is the major event. I don't think from a market standpoint that most people have discounted the fact that it is going to be a fairly fractured mandate like we have seen in the past. How do you then bring all of these together on some kind of a platform to say this will be the government? I think that is where the difficulty lies in calling Indian elections. It is not like the past where it was Congress driven elections. This time the stakes are across the board, so you have difficulty in guessing which formation has the best game in town post election. That is why you are possibly going to see some recommendations to safety or safe haven measures around pre-elections or elections and then you could have a little definitive move immediately thereafter up or down depending on what formation comes out finally. So, that is why you call this an event risk.

Q: Do you expect to see any huge change in infrastructure spend depending on who comes to power or do you think most parties or even a third-front party will probably work with the same issues or grapple with the same issues right now of large public finances spilling over?

Bhattacharya: I broadly agree with the people who took part in the polls. I think there will be an increase in investment in infrastructure. There is no doubt about it whichever government and whichever formation come to power at the Centre, we are bound to see a sharp increase in spend on infrastructure which is prime need of the hour. Yes, there is reasonable to expect tax cuts but I don't know whether the government that is formed after the elections will be as adventurous as the National Democratic Alliance (NDA) government was on privatization or divestment of government's stake in PSUs. Even if you look at the NDA's manifesto, they themselves are cagey and cautious on disinvestment of government's stake and equities. So, wide infrastructure spend yes, more tax cuts yes but whether the new government to be formed after the elections will go in for more divestment of stakes in PSUs, I have my own doubts.