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INC wrested three key states in the Hindi heart land from BJP. The mirror has been shown to the incumbent BJP dispensation for course correction in case they intend to. INC failed to hold its last fort Mizoram in North East to a regional party and its ‘Maha Gathbandhan’ trial in Telangana boomeranged as a non-starter given the resounding victory of the ruling regional party there. Overall, a tight rope walk ahead for NDA.

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Glass Still Half Full: Post State Elections

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ONE ELECTION – MANY MESSAGES FOR 2019

INC wrested three key states in the Hindi heart land from BJP. The mirror has been shown to the incumbent BJP dispensation for course correction in case they intend to. INC failed to hold its last fort Mizoram in North East to a regional party and its ‘Maha Gathbandhan’ trial in Telangana boomeranged as a non-starter given the resounding victory of the ruling regional party there. Overall, a tight rope walk ahead for NDA.

RENEWED LIFELINE TO INC

The outcome of the recently held state elections has put BJP on a shaky ground in the run up to the national elections in May 2019. The results of the key three BJP ruled state polls (Rajasthan, Chattisgarh and Madhya Pradesh) suggest that INC has an advantage in 35 out of 65 parliament seats, an increase from 15 in 2013. BJP’s tally should likely drop from 47 to 25 assuming parliamentarians elected in proportion to legislators.

Anti-incumbency across these three states has helped INC. MP and Chattisgarh had three consecutive terms of BJP governments while Rajasthan followed a trend of change for every five years. When we look at the voting patterns, rural constituencies have tilted the balance across the three states to change. These elections could be a precursor to the national mood with respect to Rural and Agrarian regions. Also, these states have large presence of MSMEs who have seen severe stress from Demon, GST and ongoing liquidity crunch.

However, it is too early to assume that the INC will be able to repeat its state-level performance at general elections, since most of the three contested states had only two political parties (BJP and INC). In much of India, there are at least three parties contesting seats, and the INC has limited presence in most parts of the country. Multiple pre-poll surveys had indicated that while the state populace appeared disgruntled at the incumbent state leadership, they in fact did not rile as much against the Modi reforms. On the other hand, the BJP led Union Government has only six months for any course correction should it intend to address rural, agrarian and MSME constraints.

NORTH EAST’S ADIEU TO INC

Mandate of Mizoram assembly is one way in favour of regional party MNF. This could be a blow to INC which it had controlled for three terms. As a state, this result could have insignificant impact as it has only one parliament seat. North East overall has 25 seats in parliament. With this election, BJP has reinforced its foot print directly or with its coalition partners in all the eight states. This is an advantage to NDA over 2014.

A NEONATAL SHOCKER TO ‘MAHA GATHBANDHAN’

INC driven congregation of regional partnership has suffered a flop show in its first state – Telangana. Incumbent regional party (TRS) held back the state by improving its tally significantly beyond two thirds majority. This has decimated most of the regional parties and their vote base in favour of INC, helped the latter maintain its tally. This outcome could shake confidence of regional parties as the national party (INC) gained at their cost.

Also, TRS could move closer to BJP, post general election as a coalition partner of NDA. Which is likely to win ~15 seats in parliament proportionate to its assembly seats.

FOCUS SHIFTS: GENERAL ELECTIONS 2019

Another unpredictable event to unfold in the coming months – the Indian General Elections. In the next few months, a lot of views can be published, however, the long-term market performance will not be dependent on those opinions. For all the market participants, this election is a much-anticipated event and is probably the epitome of short-term speculations. However, we believe that investor frenzy surrounding this event seems overstretched and largely unwarranted as well.

POTENTIAL SCENARIOS: ALIKE TO JANUARY-2014

Best Case: BJP coming back with simple majority or a BJP tally of 230+: Markets could open gap up 20%.

Base case: BJP touching about 180 seats and forming government with coalition partners. Markets could gap down by 10 - 20%. Reforms could be selective.

Worst Case: BJP/INC winning less than 180: A regional party led government: Markets could open gap down by 20%. This government could be short lived as seen earlier.

LAST MAN NOT OUT YET: BEFORE ELECTIONS

  • Ram Mandir issue could change political climate
  • Union Govt stimuli to ease farm and rural distress
  • New RBI Governor could untangle the PSU Banks
  • Easing NBFC & HFC constraints to help MSMEs
  • Extradition of fugitives to revive the antigraft mood
  • Tamil Nadu bye elections to unravel coalitions
  • Political re-alignments towards vote consolidation.

PLEASANT SURPRISE: MARKETS RALLY

Still, the state polls have been taken positively by investors, boosting Indian equities, fixed income and the rupee benchmarks higher despite of surprise exit of RBI Governor just a day before. Like, any other bad day, yesterday too we saw dramatic moves in all the three markets. The roller-coaster ride though, ended on a pleasant note as a reality check prevailed over knee jerk reactions and markets ended in the green.

We think FPI flows could get slowed in the short term with the change of guard at RBI. Foreign investors would likely seek policy continuity led by macro fundamentals rather than political tunes. On the other hand, domestic equity inflows continue to be healthy with the new-found formalization and financialization initiatives and the absence of a suitable alternative performing asset class.

Disclaimer​

Different types of investments involve varying degrees of risk and past performance is no guarantee of future results. Do not assume that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended or undertaken by us) will be profitable. Results may vary over time and from client to client. Any projections or other information illustrated in this presentation which may have been provided to you regarding the likelihood of various investment outcomes are hypothetical in nature, and do not necessarily reflect actual investment results nor should they be considered guarantees of future results. Historical performance results for investment indices and/or categories have been provided for comparison purposes only and index returns may vary substantially from past performance in the future. Other investments not considered in the analysis and the recommendations resulting from this analysis may have characteristics similar or superior to those being analyzed. Please remember to contact Wadhawan Wealth Managers Pvt Ltd if there are any changes in your financial situation or investment objectives or if you wish to impose, add or modify any reasonable restrictions to our services.

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