Caught between macro & economy, market wants comfort of political stability

Election results impact sentiment and market far more than corporate or economic fundamentals. General Election results have larger impact on sentiment and market than state elections. The last three general election years, viz 2004, 2009 and 2014 returns were impacted by election results.  

As a fund manager picks up monthly data to sharpen their annual forecast of company performance, markets factor in available data point to forecast future.  

Karnataka election result is one data point to forecast post-2019 election political set-up. Market will use Karnataka Assembly election results to forecast a trend for 2019 general elections. That said, 12-months is too long a period in politics, so the result impact will be transitional if events unfolding after that indicate contrary to the forecasted trend. 

Indian markets are facing deteriorating macros with higher oil prices and rising interest rates in the US amid global trade wars. Rising crude can impact India's twin deficit — trade and fiscal — adversely significantly. Weakening rupee can unnerve debt foreign institutional investors (FII) investors who have pumped in $80 billion as a non-index bet on India. 

However, for the deteriorating macro, there are a few silver linings. Monsoon is expected to be normal. Real Interest rates in India are high and has kept inflation under check. The economic momentum for India is building up strongly. The index of industrial production (IIP) numbers for last four months are above 7 per cent, GST (goods and services tax) collection has crossed Rs 1 trillion for the first time in March 2018, tractor and CV (commercial vehicle) sales are at all-time high levels with waiting period not only for luxury cars, but also commercial vehicles; air traffic is growing in double digits, tourist arrival has crossed one crore mark, bringing in $27 billion tourism revenue. 

Domestic investors, after demonetisation, are showing a preference for financial assets. Foreign direct investment (FDI) is increasing at a record pace. Aadhar and JAM trinity has ensured fair distribution of subsides. In a nut shell, Indian economy is gaining strong momentum despite macro concerns of oil and trade wars. 

At this crucial junction, market wants comfort of a political stability. It is caught between improving economic momentum witnessed in good quarterly results and deteriorating macro in form of rising interest rates and oil prices apart from election uncertainty around 2019 general election. Markets are pricing both — rates and oil prices — as transient and doesn't expect them to remain elevated for a longer period of time. There is no sure way to predict election results a year ahead of actual election.

It will be far better to play contra for political risk in 2019. If markets are pricing in stable government, may be it is worth taking some profit out. If markets are pricing in a coalition government in 2019, may be it is worth taking more risk. In case market is right, you will lose some more; but if market is wrong, you will make a lot of money.

My advice to investors will be to vote for a stable government and follow asset allocation discipline to tide over the volatile markets in months to come.

The author is managing director at Kotak Mahindra Mutual Fund. Views expressed are his own