Recently market has reacted wildly tanking near two percent to the exit of TDP?s (Telugu Desam Party) from the NDA. Concerns about the continuation of economic reforms after TDP quit the government led to the broad based selling in the stock markets. Exit of TDP from the NDA after its Ministers? exit from the Union Cabinet and the recent session strident disruption by its MPs of both the Houses of Parliament had been more or less factored by Market. Market is concerned with the shocking BJP defeat in the UP by poll and formation of alliance by the prospect of SP & BSP and its likely adverse impact on BJP?s tally from UP in 2019.
Government?s ability to take-up economic reforms bills such as new banking licenses, increasing FDI limit in insurance, opening up retail for FDI and reign-in fiscal deficit will be weakened by any instability in the ruling alliance. Any re-alignment in the ruling NDA alliance can significantly change political equations and alter the government?s focus, even though there is no immediate threat to the government.
The market expects BJP to win the next elections. Though in the minds of the investors the probability has moved down in the past six months. Gujarat poll results and more recently the UP and Bihar bypolls has impacted the investor sentiment about political stability.
Political risks are not fully priced in, can arise at any point in time & affect sentiment and create new bouts of volatility. Political risks should not be taken lightly and dealt with proper hedges. With the Centre elections in 2019 and many states assemblies going into elections this year, political developments will have an impact on market movements.
It will be vital for the BJP to defeat Congress in the upcoming State elections in Karnataka and retain power in MP, Chhattisgarh and Rajasthan and more crucially overcome anti-incumbency. Twin challenges are now faced by Indian markets- a rampaging Trump trying to wage a trade war with US? trading partners and it?s disruptive fallout on global trade as well as political issues weighing on the Indian domestic front. In the Indian equities the downside tough looks limited due to a likely strong rebound in corporate earnings over the next 2 quarters and providing a relief on the macro front by easing of global oil prices.
Market trajectory for the rest of the year would be a function of what happens globally and what happens with Indian macro economic situation. Likely rate hikes and tightening by various global central banks has weakened the global outlook a little bit. The US is much more explicit and ECB becoming a little bit tighter is also a possibility. Over the past three- four months some of the Indian macro indicators have considerably worsened on multiple fronts; GST collections are lower, fiscal situation has worsened, inflation outlook has also worsened a little bit, especially with the government making explicit statement about the MSP. With a few state elections coming up, there will be a little higher political uncertainty. Nifty companies FY18 will be closing with a double digit earnings growth. However, the earnings recovery going forward is mostly priced in, and macro concerns are much more overwhelming. So there is a chance that all bad is not over yet, and market may have a greater volatility going ahead in this year.