BofA-ML pricks Narendra Modi's Lok Sabha election 'bubble' on India's economic growth

Mar 26 2014, 18:08 IST
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Bank of America-Merrill Lynch cautions against excessive fear of the poll outcome. Bank of America-Merrill Lynch cautions against excessive fear of the poll outcome.
SummaryExpectations from 'expected' Narendra Modi, or other govt at Centre may be too much.

While major rating agencies have highlighted game-changing role of Lok Sabha elections and the 'imminent' empowerment of BJP PM candidate Narendra Modi in the top job at Centre, which they said would power the Indian economy, a new report seeks to prick that particular balloon.

Leading American brokerage Bank of America-Merrill Lynch today cautioned against excessive fear of the poll outcome as in 2004 and the over-enthusiasm of 2009, saying the market should look more at the global economic cycle and its impact on growth than who takes charge at the Raisina Hill after the hustings.

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"We can only emphasise that the global economic cycle drives growth far more than who rules in New Delhi. It is for this reason we caution against extreme euphoria ala 2009 or utter despair ala 2004 on May 16," a BofA-ML report said.

The brokerage also warned, after talking to over 20 equity and fixed income investors in Singapore last week, that the forex market players would be playing it safe and square off their positions before the polls.

It can be recalled that the market saw a massive 15.9 per cent sell-off in May 2004 after the surprise defeat of the NDA and a 15 per cent BSE Sensex rally after the emphatic re-election of the UPA in May 2009. On both the occasions, the market did not get the poll outcomes correctly.

In a report titled, 'Will markets be third time lucky? Three big ifs: Polls, the El Nino, and the dollar', BofA-ML India chief economist Indranil Sen Gupta said the consensus among equity investors is to go along the polls in the hope of a successive stable coalition.

However, "forex investors are more circumspect; most say they will square off before the polls to avoid the event risk," Gupta said.

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Gupta noted that in both the past two occasions, the market behaved irrationally: in 2004 it lost 15.9 per cent even as growth was picking up and in 2009 it rallied 15 per cent on the result day just before growth began to fall.

Gupta goes on to add that the real test for the investors will be impact of the three big ifs

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