Governments may come and go……

0
80

The famous poem ‘Brooks’ by Alfred Tennyson ends with the immortal lines:

“For men may come and men may go

  But I go on forever.”

The poem reminds us of the transience of humans and the permanence of institutions. Some individuals and governments play great roles in the rise of nations and growth and development of economies. But ultimately, in the march of time, they fade away. In a democracy, elections can throw up surprise results. Mature democracies handle change of governments with ease. Though a developing economy, India is a mature democracy, which has an excellent track record of handling change of governments with ease.

In the developed world, change of governments does not bring about major changes in economic policy. Since 1991, this is true of India too. Nevertheless, the nature of the new government and its ability to implement economic reforms is important. Therefore, from the short-term market perspective, the outcome of the imminent general elections in India is very important. We know from experience that market responds hyper sensitively to unexpected election results: both positively and negatively. Also, we know from experience that after the knee jerk reaction, the market settles down and slowly starts responding to fundamentals like policy initiatives, earnings growth, interest rate trends, market expectations and fund flows into the market.

Presently there is no clarity on the likely election outcome. The present political scenario is very different from what it was a year back when there was a near consensus that the present regime would come back with a clear majority. Recent political developments indicate a tough fight and the outcome is hard to predict. Broadly, there can be three scenarios: one, NDA under Modi coming back, but with a reduced majority; two, a coalition led by the congress; three, a Third Front coalition supported by the large party from outside. The first two scenarios would be acceptable to the market, but the third scenario would be short-term disruptive with a likely market correction of more than 10 percent.

Should investors bother too much about the fall-out of elections?

It is our experience that politics do not matter in the long run. The market doesn’t have any preference for a particular political party. The market wants business-friendly, market-friendly governments, which can implement growth-stimulating economic policies with fiscal and monetary stability. Single party governments, though politically stable, need not be better than coalitions, from the economic perspective. In fact coalitions have delivered superior GDP growth, earnings growth and market returns. Therefore, there is nothing to be alarmed about coalitions. But, if the elections throw up a shaky, unstable, cantankerous coalition with leadership from a regional party, the market would respond negatively. Even that would be short-term disruptive which might provide opportunities for cherry picking.

So let’s keep our fingers crossed and continue to invest systematically without bothering too much about the election outcome. After all, like Tennyson’s Brook, governments will come and go, but the nation, the economy and markets will go on forever.

LEAVE A REPLY

Please enter your comment!
Please enter your name here