If we judge by history, then we can expect the Indian equity markets to go on a wild ride for the next several weeks to months following the country’s general elections which are set to conclude on May 16.
Let us look at some history, in 2009 the Indian National Congress or INC coalition won with an overwhelming victory. As a result, India’s benchmark the Sensex gained 20.5 percent in the five days after the election results. In 2004, when the Bharatiya Janata Party (BJP) lost, the Sensex tanked more than 16 percent in the same time frame. History tells us that elections, in India, are indicators of equity volatility. Then, as time goes on, after a few months, markets begin to reflect the economic realities and calm down.
After the BJP lost in 2004, the Sensex eventually returned to gains. An improving economic outlook calmed sentiment and the Sensex was up over 14 percent for the nine months after the elections. In 2009, despite the global recession, the Sensex outperformed Western equity markets and was up 40 percent in the nine months after the elections.
What Should Investors Expect with this Election?
Should the National Democratic Alliance (NDA), which is led by the BJP, which is expected, then we will in all likelihood get a good reaction from the equities markets for the rest of 2014. Polls show the opposition BJP, whose leader Narendra Modi is running for prime minister, holding a strong lead in opinion polls. Businesses like Modi because he leans towards business friendly policies. His party has promised to improve infrastructure, hasten oil and gas exploration and enact much needed reforms to the tax code to attract foreign investors. This should kick the sluggish economy back into gear and towards heftier expansion.
Forecasts are expecting a 10 to 10.5 percent year-end gain for the Sensex. Analysts are leaning towards an extra 5-7 percent gain should the NDA win with a sizeable BJP presence in the parliament. Last month Indian equities had their best month since last October. They are currently up six percent on the year. These gains are not driven by positive feelings of economic growth and recovery but thanks to less macroeconomic stress on the economy.
We have seen a positive with the reduction of the current account deficit. Inflation is, likely, going to remain under control. A stronger government should be able to facilitate growth with better fiscal discipline for short term gains. As for the longer term, this government, if it wins, will put an increased emphasis on the supply side for long term growth.
If the NDA does not win with a majority coalition then this would be a negative shock for India’s equity markets. Investors could take their capital out of the markets which would mean a resurgence in balance of payments pressure on India. We could also see a downgrade on India’s sovereign debt thanks to this capital outflow as losses could make it harder for India to pay debts in a timely fashion.
No matter the outcome, it is time to buckle up for those investing in this emerging market.
Binary Options Take for the Day:
Elections throughout the Asian area, from India to Indonesia, will make for some volatility today and the rest of the week. Gold is above $1300 now targeting $1350 with a break above $1325 and Copper is weaker thanks to economic softness with China’s exports. Watch commodities like aluminum and copper.
Discussion:
Do you think it is the right time to invest in India’s equity markets? History shows us we are likely to get volatility over the next several week and months. It could be a good time to hedge your portfolios and look into Indian companies. Sound off below in the comments section.