India?s economic credentials are likely to have a higher bearing on the market trajectory than an increase in political risks, believe market experts. Although they acknowledge that an early election or a difficult coalition mathematics could result in higher volatility, they expect investors to be more attuned to the next ruling party?s policy framework. In their opinion, notwithstanding any alliance, the key factors that would drive the market are oil prices and project pickups that have been stalled in the last two years.
Andrew Holland, CEO-investment advisory, Ambit capital, believes that no matter who is in power, as long as that political party puts forward a strong reforms agenda, the Street would focus on such plans. ?Continuity of stable policy growth is most important and the market will remain confident as long as economy is going forward,? he added.
Citing past instances, experts put a strong case for the fundamentals to play bigger role in market returns. ?The market has always given positive returns for one year to the election as economic fundamentals have increasingly played a bigger role in last two decades,? said a fund manger. The years 1996 and 1998 are perhaps the only exceptions. An FE compilation of the market returns showed that while the hung Parliament in May 1996 ? during which the BJP failed to form a government -? had a visible impact on the market, for the rest of the two years, the financial crisis in east Asia as well as RBI?s interest rate actions impacted the market momentum. In the second half of May 1996, the market lost 5% of its value. However, even amid political uncertainty that lasted till the next general election in February 1998, interest rate cuts and corporate earnings guided intermediate market changes.
Even the events of the recent past seem to be making a case for dominance of economic risks over those stemming from politics. For instance, as a reaction to a sharp decline in global crude oil and gold prices, that strains the fiscal and the current account deficits of India, the Sensex gained as much as 5% in last two weeks, more than its response to the political unrest of mid-March this year.
Indian equities turned jittery after DMK pulled out its support to the ruling UPA government. On the back of this development, the market correction appeared aggravated since mid-march as traders turned cautious. Now, there are concerns that the next general election may result in a fractured mandate.
Sankaran Naren, CIO of ICICI Prudential AMC, points out that there have been instances in which a coalition government has led to strong economic growth while a stronger government has not. ?Hence, more than the constituents of the government, their policy for acceleration of growth would be deemed more crucial,? he added.