The Assembly election results, considered as a dress rehearsal for the 2014 General Elections, drew huge voter participation and resulted in massive upsets in some states.
Contrary to the expectations, Congress fared poorly in the critical UP Assembly polls while SP swept the state with a clear majority. The Sonia Gandhi-led party performed poorly in two out of four of the other states.
The markets fell over 1% on Tuesday to its lowest close in more than five weeks after the setback to Congress.
Below is an extract from one of the well-known research houses, on what the election outcomes mean for the markets:
Citi Investment Research & Analysis
It's a negative surprise for the markets; talk of mid-term polls: Market expectations have been belied. The hopes of the Congress being a critical ally of the SP at the state level and consequent reciprocal support at the Centre are now unlikely. Given the poor performance of the Congress, there is now talk of mid-term polls. The markets reacted negatively (although so have Global markets today) – given it was expecting a stronger Congress show; which would translate into increased flexibility in economic decision-making.
But there could be a silver lining: Not immediately, but the BJP – the primary opposition party – has put in a strong show (excluding in UP). This is something the market could start looking at for the next General Elections (2014, but who knows?). Remember, the BJP effected meaningful reform, when in government (1999-2004). It might not be the same reform-oriented party – but it does have a track record.
What does this do to economic policymaking: Consensus would suggest the Congress will get more cautious; i.e. effectively hand out more sops resulting in further fiscal slippages and move further away from reform – a mix that will be negative for the Macro. This is not necessarily the case – the Congress could well be much more forceful with reform given that back peddling on them does not seem to be paying electoral dividends for now. But, in our view, we think the odds favour more defensive rather than offensive economic management from the government from here.
What could this do to the market if the Congress goes on the defensive: Raises the risks to the current rally, as expected reforms may stall; the macro could strain, and capex may slow. In effect, economic revival gains that the market has started factoring in could be challenged. If so, sectors most impacted would be financials, capital goods rate and other investment/rate cyclicals; and defensives will be back to dominating. If, on the other hand, the government uses this as an opportunity to change its agenda into a more reform minded one, then the leaders of the year-to-date rally -- financials, capital goods and other investment-driven themes --would continue to run. The Budget – 10 days from now – will better determine the direction this slightly hobbled government, and therefore the market, will take.