Investors continue to flirt with the unfaithful stock markets, especially when facilitated with news offering a glimpse of better days ahead. This time the hope appeared in form of exit poll predictions that suggested BJP is sweeping the Hindi-heartland assembly elections, which is also presumed to be a close run up to general elections scheduled in early 2014.
The follow up rally in the stock market may appear strange, evident by premonitory aspersions of numerous experts; the established pattern of such resurgence in the market against slightest hint of optimism may be signaling an undercurrent contrary to popular belief. When Sensex rallied more than 400 points on Thursday, the day after exit polls gave their probabilistic verdict, experts quickly warned that the rally was built on news hype. They cannot be outrightly declared wrong, especially considering what they assumed the real reason of the rally was. If BJP indeed sweeps the states as predicted, the rally in the market came as a result of exit polls will be vindicated.
However, it cannot be revered as a complete picture. Evidently, even if Congress were projected to sweep the states, by all logics in financial parlance, the market would still have rallied. Market is not known to behave on the basis of performance of a political party in particular; it responds to policies, governance and stability. A clear verdict to a party certainly strikes off stability of government as a parameter of concern. The ensuing rally in market is simply a celebrating-response to much needed stability. The rally on last Thursday is example of one such celebration.
At present, politics is dominating economics and therefore, events related to economy are likely to be analysed against political side effects. Nonetheless, businesses, at the same time, are closely reviewing unfolding political developments, which, in all probability, will decide the economic fortunes of the country. The market is certainly not happy with governance and policies of present government, which has also been slammed for deteriorating economic conditions. Not that the Indian story is completely lost but general discontent is primarily about the lost opportunity at a time when India could have become the fastest growing economy in the world. Discontent notwithstanding, if India could clock a 6 per cent growth rate next year, it would be next to China among the BRICS - the largest blocks among the Emerging Markets (EMs). Evidently, present scenario is not as bad if viewed in hindsight.
Indian economy is suffering with a few structural flaws that has a potential to impede economic policies and governance of the next government at the center irrespective of the partyelected. Besides the threat of stagflation (low growth and high inflation), the next government will find its hands tied due to numerous active non-productive legislations including food security bill, land bill and so on. With such guzzlers in place, a large chunk of resource that would otherwise have been used for growth would be dedicated to keep the electoral happy. In other words, Indian economy has been booby-trapped and is going to hurt whoever is in charge.
In such scenario, a rally in the market would seem fragile and news driven. However, it will be a blunder to brush aside the collective wisdom of the market. Instead, it may be wise to study the factors that are driving the market. Presently, it certainly seems to rely on a few macros that favours India relative to other EMs. First, India's central bank has done aggressive course-correction in its Current Account Deficit (CAD) making it less vulnerable to Quantitative Easing (QE) tapering whenever the US decides to roll it out. Second, irrespective of the QE tapering, cheap money will continue to flow in EMs at least for a few more years. Indian stock market will continue to get flooded with foreign funds. Third, due to austere measures taken by RBI, currency instability is not a major risk anymore. With country better prepared than before and Rupee more stable, the central bank can focus on steering the economy to the flight of growth. Fourth, major elections generally drain the economy, especially in India. With elections over, people and parties will be back to business as usual. Populism will take a back seat thanks to the new government at the helm. In absence of political impediments, growth is likely to rebound, though marginally.
Market does not appreciate deliberate blockades yet, with slightest hint of positivity it shows up its enthusiasm. The enthusiasm is not build on speculations however. India stock market has stayed range bound for five years, which also includes the time when Indian story was intact. During this period, it kept accumulating valuations that did not get fair chance to unlock. When the market rejoices for Modi (or BJP) in anticipation, it is in fact highlighting its optimism. The underlying optimism hints an undercurrent rally that is waiting to explode. Modi may simply be the catalyst.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)