Elections may be an eye-opener for investors

Some experts are baffled by the current euphoria in the Indian stock market, despite the uncertainty over the general elections and lack of plan of action by leading national parties.
India’s stock market performance over the last few years has been in line with high global growth, and supported by increase in investor risk-appetite. Corporate India saw strong growth in 2007-08 on increased export and domestic sales, and a strong investment cycle, mainly backed by foreign fund inflows.
Foreign capital inflow into India during the third quarter (July-September) of 2008 was $100 billion. However, this trend reversed due to the global downturn and in the quarter to December 2008, there was an outflow of $ 3.7 billion.
The global recession and its effect on the domestic economy has led the Reserve Bank of India to revise GDP growth lower to 6% in 2009-10. Investment banks see the GDP growth even lower--JP Morgan 5.5%, Citibank 5.2% and Credit Suisse 4.9%.
In line with this projection, latest data shows a fall of 2.3 per cent in industrial production for the month of March 2009.
“Indian stock markets have replicated the upbeat trading in global stock markets led by easing signs of global recession and higher liquidity. But the uncertainty over the political front has poses a risk to foreign flows. At present levels, I feel there is more downside risk for Indian equities as huge unwinding and de-leveraging can be seen if India fails to give strong government,” said Jonathan Paul, economist at Krug and Bordman Advisory.
None of the manifestos of national political parties provides an insight into India’s plan of action over the next five years. Instead, they are more about blaming each other and making populist promises to the neglected and minority sections to garner votes.
“Surprisingly, Indian equities react positively to the fact that the leading national parties have given more importance to the regional agenda rather than national agenda. On the economic front also, the IIP has decelerated further to -2.3 per cent. Though investors are currently fascinated by the global markets rally and have overlooked these points, post election this is likely to have an adverse impact on the Indian markets,” Paul added.
India is holding its 15th parliamentary election with an estimated 714 million voters and 546 parliament seats. The last leg of polling ends on Wednesday, May 13, and the results will be declared on May 16.
Experts do not expect the situation to be very different from the elections in 2004, when a coalition government came into being. Given the unpredictable nature of politics in India, alliances may change at any point of time.
“In case a weak parliament gets established and a government is formed after taking external support (other parties), it is likely that individual preferences take over group preferences. In this case, separation from the ruling party can bring down the government mid-term. The resultant risks in terms of setback in development, renovation of economic growth and infrastructure-building seem largely ignored at present,” said Ankit Sinha, CEO-Spark Advisory.
On the economic front, although in the long term the Indian economy remains attractive and domestic demand should be supportive compared with developed economies, from the short- to mid-term perspective, domestic demand is not so encouraging and one can also see slowdown in investment cycle.
“To get a clear view, a faster and stronger recovery in global growth and a strong single-party government are necessary for sustainable recovery on the Indian bourses. Both are not seen plausible at current point of time. Hence, I feel that the election will be an eye-opener for Indian investors,” Sinha added.
Also, with India’s already high fiscal deficit, the probability of a fragile coalition government, which will likely be populist, may worsen India’s fiscal deficit. And this could impede the already slowed foreign funds.
“In order to turn optimistic on Indian equities, one needs to get more corroborative signals of a strong government with five year growth plan post election and moderate recovery in global and domestic economies. If not this, then we may see a steep decline post election,” said Kapil Mehta, fund manager at Globe One wealth Advisory.