Markets bet on stable govt; small coalition could lead to volatility

Written by Markets Bureau | Mumbai | Updated: Apr 14 2009, 05:14am hrs
As the elections knock on the doors, big bets are being taken in the market place. Historically, over the past 15 years, markets have shown the tendency to rally ahead of elections, says Bank of America-Merrill Lynch. This is mostly in anticipation of a narrow coalition government and the sold-off after elections, since each successive government has been a broader coalition than the previous one. Over the past four polls spanning 13 years, the BSE Sensex has, on an average, risen 15% in the four months after the elections, say experts at Morgan Stanley. This time around as well, market experts are in the calculation mode.

Since the market looks out for stability in policy and continuity, if not improvement, whether the market sustains its post-election movement will depend on how the new government formulates its economic package, say experts.

Overall, market denizens have been rooting for any of the two main political parties to come to power. Both the parties have a stable outlook, while their approach might be different, say investment bankers.

However, its the Third Front that is a cause for concern. Investors need to be most wary of a Third Front government. The country has had three instances of Third Front governments. The economic performance during those short-lived governments was not something to write home about, says Ridham Desai, an associate with Morgan Stanley.

On the outcome, Morgan Stanley experts say, From our conversations with clients, the market appears to be pricing in a broad coalition government led by one of the two large national parties (Congress or BJP). The market is therefore likely to react more violently if we get one of the extreme outcomes (a relatively narrow coalition) or a Third Front government or a government with Left parties supporting it. Taking a shot at possible election outcomes and after considering probabilities to each outcome, experts at the fund house say there appears to be a 40% chance of a result that the market may not like.

The bet at Bank of America-Merill Lynch is not very different. They say, We think a positive scenario for the market is a BJP or Congress led government without the Left parties but has a low probability event in our view. Historically, Parliament could lead to a 15% correction in markets this time.

Vipul Dalal, country head of broking house Elara Capital told FE it was really not as easy as it seems. He says, Uncertainty is at the highest amongst the earlier elections. There will, therefore, be some build up before the elections and also extreme volatility, he says. Importantly, the market is ready to receive fresh blood and ride ahead, he adds.

Fund managers have rather been attached to their cash reserves, and the same will apply in the days to come.

Gopal Agarwal, head of equity with Mirae Asset Management, is watching the opinion polls very closely to get an understanding of the developments and benefit from them.

As the report by Morgan Stanley coins it, The best chance for India to partly overcome the impact of global slowdown is that the government boosts infrastructure spending. Add to this the bad fiscalsituation. This makes funding of a spending programme using public debt very difficult and hence as a corollary government will need to privatise assets or raise multilateral agency loans. The next general elections become unduly important for the market. If we get a fragmented verdict from the electorate, it could hamper policymaking, which in turn could have negative implications on growth and the markets.

The stakes have been placed, the entire scenario now depends on the mandate people decide.