Politics of markets

BEATING THE STREET

Perhaps the clearest confirmation of economic turnaround was SAIL's announcement that it had turned profitable in the third quarter of 2003-04. When an ailing behemoth like Sail turns profitable after years of huge losses, something must be right.

This feeling was confirmed by the 42 per cent surge in exports in December. Admittedly, that was a statistical aberration due to the restating of December 2002 export numbers but even after due adjustment it was an excellent performance. After accounting for the strength of the rupee versus the dollar, it looks even better.

Nevertheless, the stockmarket went nowhere. Some people will write this off to the capriciousness of the market. But I'm not so sure. These results were factored into prices by late-December-Early January. It was a classic case of "buy on rumour, sell on fact".

In terms of earnings surprises, that is, earnings gains which beat expectations, there hasn't been much to show in Q3. And of course, the market has responded to the uncertainty of elections in much the only fashion it can "" by nervous bouts of selling.

This uncertainty is likely to continue. No matter how much the BJP trumpets its "shining" position, its insecurity was made apparent recently in the public statements about Priyanka-Rahul.

A political party which is showcasing its mature, popular, experienced administrators and riding a popularity wave has no reason to be scared of two, wet-behind-the-ears kids with zero political experience. Presumably, the BJP is not quite as certain about its ability to retain power as it would like everyone to believe.

The P-Note situation has been clarified. Apart from much pious waffle, current PN players have been given five years to lay off their positions and that means status quo.

However, I would suspect that hedge funds will be cutting India exposure until such time as the next government takes charge. The volatility induced by political risk would really be unacceptable to many of them, given attractive markets and opportunities elsewhere.

This could mean a further drop of 10-15 per cent off the alltime highs. In terms of concrete numbers, the markets might settle in a groove around 1600-1800 Nifty. This gives long-term players an opportunity to selectively buy stocks they like at somewhat reduced valuations.

In fundamental terms, I would be more worried about the next monsoons and events in the global economy than in the makeup of the next government. An economy as large as India's has a momentum of its own. It would take a while to cycle out of the current growth phase, even if an economically illiterate coalition came to power.

What has been implemented so far in the reform process cannot really be undone. Even if the current opposition comes to power, it is unlikely to stop building roads, liberalising the power sector and suddenly overturn telecom policy.

The Congress is well-aware that it lost the recent MP, Rajasthan and Chattisgarh elections because it didn't deliver basic infrastructure services.

If the next monsoon is bad, it would shave percentage points off the GDP growth rate while a good monsoon would add impetus. If the global economy continues its recovery and other nations don't copy-cat the US anti-outsourcing law, exports would continue to be buoyant. That's more important than the shape of the next cabinet.