Polls to UP, Punjab crucial for stock markets

When assessing the impact of the forthcoming state elections on Indian stock markets, we were reminded of this quote by father of value investing Benjamin Graham: “In the short-run, the market is a voting machine but in the long-run, it is a weighing machine.”

And given the current context of state elections, it does seem to be a little tongue-in-cheek. But no one can question that at least in the short-term, there is a definite link between politics and market performance. And since we strongly believe in investing in fundamentally sound companies for long-term, we are not much bothered about the short-term volatility.

With elections to 690 legislative assembly seats in five states round the corner, most market participants are trying to prepare themselves for coming months. The polling is to begin from February 4 and continue up to March 8. The results will be declared on March 11.

These polls, in the backdrop of demonetisation, are being seen as a test for the Narendra Modi-led BJP government at the Centre. For the BJP, there is a lot at stake. Many are considering these elections to be a semi-final before the 2019 general elections. And with government having surprised the nation with demonetisation just a couple of months ago, it could be an acid test for the BJP.

Many believe that note ban was announced keeping in mind these elections. It is common knowledge that political parties use cash bribes in exchange for votes. So, with cash being tracked and in shortage, the parties that were planning to take the cash-for-vote route may face big trouble in these elections.

Now ideally, voters will understand the difference between state and general elections and vote accordingly. State elections, at least theoretically, are decided based on local issues. But cash crunch has touched the life of every Indian; though some have taken it positively, many others have taken it negatively. So, how people vote in these elections where BJP has a lot at stake, will be keenly watched. No doubt, local issues and state dynamics will dominate. But ‘note bandi’ will also be kept in mind while voting.

The spotlight is clearly on Uttar Pradesh (UP). The BJP did extremely well in UP in 2014 general elections by winning a massive 71 of the 80 parliamentary seats. Given the enormousness of this victory against mighty state-strong parties like the Samajwadi Party (SP) and BSP over two years ago, the most predictable outcome could be a big BJP victory again in 2017.

But 2014 was about general elections and 2017 is about state elections. Also, the BJP lost the Delhi and Bihar state elections after the 2014 victory. So, there is no guarantee of a BJP victory. But there is considerable excitement in the power corridors of the state.

As regards other parties in UP, the SP had been a strong contender. Its internal squabbles, now resolved, were seen as a big positive for the BJP and the Mayawati-led BSP, as the family feud had left SP’s own voters confused. But it may not be the case now. The Congress, which has lost considerable clout, is looking to enter into an alliance with the SP.

As for the BSP, the party is again playing its reservation card and is trying to woo the Dalits. In addition, it is trying to corner Muslim voters post the SP’s internal crisis. But the BJP is leaving no stone unturned to woo the community as it tries to highlight the issue of triple talaq and Uniform Civil Code for the benefit of Muslim women. If it succeeds in this, it might mean migration of at least a small percentage of Muslim voters towards the BJP.

All in all, UP has a huge say in Indian politics, and hence gets more highlighted than the polls in Punjab, Uttarakhand, Goa and Manipur. So a win here for the BJP will mean that Modi’s charm and development politics still have takers in UP. But a loss could dent his credibility to some extent.

In Punjab, the ruling alliance — Akali Dal and BJP — will to try to hold on to power but it will be difficult. The BJP’s state partner has many corruption-related questions to answer. This is in addition to a substantial threat from the Aam Aadmi Party’s (AAP) rise in the state.

In fact, chances of the AAP upsetting the power dynamics of the state cannot be ruled out. Goa, Manipur and Uttarakhand, too, will see parties competing against each other. But the impact of elections in these states will not have much consequence on national policies or markets.

Impact on markets

What do these elections mean for the stock markets? The results of these state elections will be taken by the markets as an indication of trends for the 2019 general elections. There is bound to be volatility around the elections. Market and investors want BJP to win as it has increasingly taken steps that are pro-economy.

So a strong BJP showing (especially in UP) is bound to cheer up the market as well as foreign investors. On the other hand, a weak result for the BJP could dent market perception about its ability to return to power in 2019. It will also put forward a lot of questions about whether Modi’s policies have any acceptance among the people of country now.

Depending on the BJP’s performance in key states of UP and Punjab, markets could be volatile at least in the short-term. A poor show by the BJP might lead to short-term impact on markets, which long-term investors can utilise to buy stocks of fundamentally sound companies at bargain prices. But a strong performance by the party will prove its strength of having won elections in major states even after executing moves like demonetisation.

(Manish Goel is Founder and Director, Gaurav Goel  Founder and CTO, Research and Ranking, a Mumbai-based equity advisory firm)

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