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Bihar election results will be a non event for the market
Highlights
As the father of value investing Benjamin Graham once said, the market is a voting machine in the short run but a weighing machine in the long run. His investment advise should still be considered sacrosanct today but with our definitions of short run and long run adjusted for high frequency traders!
As the father of value investing Benjamin Graham once said, the market is a voting machine in the short run but a weighing machine in the long run. His investment advise should still be considered sacrosanct today but with our definitions of short run and long run adjusted for high frequency traders!
Almost all major brokerages and banks have taken field trips into the heart of Bihar to understand the dynamics of what is being billed as the election that can make or break the Indian equity rally.
If the BJP wins, it will surely mean that Modi's popularity and Amit Shah's strategy have no match in the political arena at the moment. It would mean that the people of Bihar have voted for development or "parivartan" yet again. A strong win would also open the doors to gaining more hold over the Rajya Sabha, where the legislative logjam caused by the opposition has really held back our potential growth prospects. Most importantly, the market is also the greatest extrapolation machine. A BJP win in Bihar will also affect Dalal Street's view on the 2017 Uttar Pradesh elections as well as the 2019 national election. A political pundit will find this hard to digest but this is what the equity strategist will make of a BJP win.
If the BJP loses, newspaper headlines will read "Nitish/Lalu do a Kejriwal in Bihar". Question marks will be put on the Modi wave, the Indian growth story, whether or not FDI inflows will take a hit, and inferences will be made on other upcoming elections too.
For a state that contributes merely three percent to the Indian GDP, the market will most likely only give us a volatile move on the election result day itself. It is highly unlikely that the Bihar elections will set the medium term trend for the Indian markets.
Even after the surprise 50 basis points cut by RBI Governor Raghuram Rajan, real rates remain at drastically high levels. Global equities have staged a huge rally in October on the back of dovish statements made from the US Federal Reserve and the European Central Bank. India has not participated in this liquidity driven up move. Market sentiment remains weak and a BJP loss can take the Nifty to levels below 7800. Index stalwarts like L&T, ICICI Bank, ITC and a host of other blue chip names remain near their 52 week lows. Valuations suggest a strong sell off will take us in a price zone where institutions will be buyers. Similarly, with sentiment so weak, a surprise BJP win will surely give us a strong relief rally to around levels of 8,300-8,400. But beyond that, the trade will be based on global economic conditions and our domestic economic indicators alone.
Don't read too much into the Bihar outcome. There is always a next big election. Market trends are never defined by a political outcome, especially at the state level.
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