Short term politics will affect our markets

In all parts of the world the link between politics and economy is a strong one, more so in a country like Indis where the direction of the economy is often determined by the political ideology the ruling dispensation has. Fortunately, in the last 20 years or so economic policies have not really changed directions too much, even though political alignments and power have changed a few times in the country. However, post the BJP coming into power in 2014 this implicit cooperation that political parties had on economic policies seems to have broken down.

Let me try and explain what I mean by that. In the past you would have expected a serious battle on something like the Land acquisition bill as it involves an ideological issue where both the BJP and opposition have very different viewpoints. GST is a different matter – in this the expectation was for the main parties to collaborate as the benefits were significant for all concerned. This has clearly not happened as the long drawn out blockade of any legislative business in the Rajya Sabha has meant there is no real movement on this front. The impact of this and a few other bills not moving through is serious as the land reforms and labor reforms along with GST were seen as crucial pre-requisites to change the face of the country and propel it to a different league as far as ease of doing business is concerned.

Why has this happened – it is a complex situation but the core explanation is a simple one. The opposition and mainly the Congress party are really worried that BJP and mainly Modi will get into an unassailable strong position once some of the policies start reflecting the results on the ground. This has already happened in the area of foreign relations, where the stature of India today is a hugely improved one. Once the investments happen into the country as committed in the many agreements signed, the economic situation in India will change dramatically and this will start benefiting most people across all classes of our society. This will clearly be a death blow to parties like the Congress, SP, BSP, RJD etc who are more into the politics of caste, creed, religion and poverty. As these parties now have an existential dilemma they will fight tooth and nail to oppose anything that may have even a remote chance of putting the BJP in a good light. The battle lines therefore are well and truly drawn.

With this background let us see what are the events that are likely to unfold in the near future:-

  • The most important event this quarter is the elections in Bihar. In it’s desperation, the opposition has come together forgetting all their ideological differences to somehow stop the BJP. If this succeeds then they will get fresh wind in their sails and keep blocking legislation in the Rajya Sabha.
  • On the other hand if BJP wins, the opposition is likely to turn cooperative out of necessity as they will see their obstructionist attitude is not benefiting them at all in the hustings. Under this situation it is very likely that all legislation that is blocked today, will get passed in the winter session of parliament.
  • The markets are already anticipating good Q3 and Q4 results and some of the other indications on Inflation, IIP numbers etc are already indicating optimism. A win for BJP in Bihar will bolster the investor sentiments greatly and quite possibly even the FII money, which is lately leaving the markets might return.
  • Along with this, if the winter session of parliament goes well from the perspective of passing the blocked bills, the positive optimism will be enhanced.
  • Assuming that the results of Q2 show good earning growth, the Nifty can run up to 8500 on news of a suitable election result and probably much further on the parliament outcome as well as Q3 results.
  • On the other hand if none of this happens, it is very likely that the Nifty will be range bound with 8000 being the base around which it may oscillate over 250 odd points in either direction.

What should you do as an investor? Keep adding to your equity positions both in stocks and MF. Due to the prevalent uncertainty there will be several buying opportunities that the markets will present and you must utilize these. Follow the sound principles of buying in small lots, always keeping some cash in hand and buying through price triggers. Investments made at these times will bear fruit in the next couple of years, so we are not really talking long term here.

We can all hope that some day politics will become irrelevant to the economic growth but India will take some time to get there yet.

Advertisements

One thought on “Short term politics will affect our markets

  1. A few points of divergence:
    Bihar win or lose is not going to change power dynamics in Rajya Sabha much
    Published IIP numbers are not growing – independent GDP estimates of RBI, WB, IMF, UNCTAD are all cautious for this year & next
    Lower inflation is due to contraction in demand and commodities/oil prices
    GST implementation may not benefit the common man without a cap on (overall) taxes
    Land bill is skewed towards farmers and will make all infra & industrial projects expensive
    Investment announcements in road shows and conferences hardly materialize (less than 5%)
    In the short term, Chinese market is cheaper for FIIs even with 6.8 – 7% growth and we are over prized
    Sovereign redemption pressures and FII withdrawals would continue for some time

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s