Political volatility and Indian stock markets

Globally politics have always been an influencer of the stock markets and market participants often look at estimating the moves of the political leadership and how their policy decisions will have an impact on stock prices.

The recent tensions between USA and China for example have been a massive overhang on the markets globally.

In the past Indian markets have also seen lots of volatility around election periods, however it is after a long time that the public has been so divisive over the political scenario in India. Supporters of UPA and NDA respectively have been very critical of each other’s moves and the rise in social media has led to a lot of mudslinging on the opposition’s agenda.

The markets definitely favour NDA and would like to see Modi and team come back to power in the 2019 general elections towards the mid of next year.

However there is also the small matter of a number of state elections coming up prior to that which include some BJP bastions like Rajasthan, Madhya Pradesh and Chhattisgarh. Some other important large state electons are likely to come up very close to the national elections including Talangana, Andhra Pradesh and Odisha.

While state elections may have a limited impact on national elections, the point remains public sentiment is likely to be affected by the swings during polling, exit polls as well as results.

Some may try to use it as a barometer for the general elections in 2019 as well.

Any loss to NDA will definitely dampen sentiments and is likely to drag the markets lower especially given the impact of a globally gloomy trade scenario, rising crude prices and dropping rupee-dollar ratio.

While most experts are of the belief that NDA is likely to retain power, they are also of the opinion that they are surely going to lose their seat share which had seen a massive landslide victory in 2014 on the back of a huge anti-incumbency vote by the masses.

Subsequently some of the decisions have not gone down well with some sections of the BJP vote bank and many of their election agenda remain partially or fully unfulfilled, which will effect the vote share.

However the potentially more scary prospect of having a united opposition front with no clear leadership may drive votes in favour of NDA eventually as Congress has not proved to be a challenging an worthy opponent thus far.

What is almost certain is that there will be some swings in either direction during the next 6 months or so, however the volatility is likely to remain short lived.

Once the next government is in place by mid of next year, the focus will shift away from politics and onto more strong fundamentals like demographics, corporate governance and earnings. India is certainly poised well in these regards and still holds the tag as the fastest growing large economy, the sixth largest in the world in fact, and getting ready to move up a couple of ranks in the next few years.

The markets are trading close to their historic P/E multiples and there is little to suggest that there is any medium to long term correction due in the markets. The short term volatility for the next month or two can be used as excellent buying opportunity for an investor who is able to bear short term swings in order to reap returns over the longer time frame.

In fact historical data suggests that the periods after a new government has been appointed have usually reaped good rewards for the patient investors, and my advise to regular equity investors is to digest the jitters in the market in shorter term and buy quality stocks on dips in order to reap the benefits of broader market upswing expected post elections next year.