Since 2013, the Indian economy has been on an upward trend, despite intermittent shocks. The financial market has also been on a good run since then. The year 2018 was, however, volatile for both the Indian and global markets. After a good run of economic expansion, financial markets are preparing for a slowdown in global economic cycle and reduction in easy liquidity.
The year 2019 is going to be an interesting year for the Indian economy as well as the financial market, given the upcoming general elections and several global events like the US-China trade negotiations, global monetary policies, crude oil prices and elections in Europe, which will have a bearing on developed and emerging economies and on global markets. Experts expect moderation in Indian economic growth in 2019.
The IMF has forecast 7.5 per cent growth for India in 2019-20. But general election being the big upcoming event in next three months, the market is expected to be volatile in the run-up to the polls. Currently, the market is caught in a tight range. A limited breakout on the up or downside was expected after the budget on February 1, but equity market has remained stuck in the same range.
Chances are it may drift lower in the near term. Post-Pulwama geopolitical concerns are also likely to keep investors on the edge. As fear of populism grows, risk-to-reward ratio looks unattractive and the upside from currents level appears muted. Last month, global investment bank UBS said in a note that the Nifty50 index is likely to hover in a range this year: 8,200 on the downside and 11,900 on the upside.
The Nifty had hit a record high of 11,760 in August 2018. Election-driven volatility is likely to continue till the first half of 2019. Post-election, FII/FDI inflows and investment, both public and private, are likely to see a rebound, depending on the outcome of elections and global conditions. India’s macros – growth, fiscal deficit, inflation and current account deficit – are more or less favourable.
But corporate earnings have been sluggish for quite some time, though they are showing signs of a turnaround. So, after disappointing returns in 2018 at index level, how will 2019 pan out for equity investors? Currently, most of the chatter in market hovers around the outcome of the general elections. UBS has analysed four possible scenarios: BJP single party majority, BJP-led coalition, Congress-led coalition, and Third Front coalition.
It seems the market is factoring in the first two scenarios. Investors and brokerages would be happy to see the BJP back in power with full majority. In this case, according to UBS, the market would get a re-rating and the Nifty could make a new high of 11,900 by end of 2019. On the downside, 10,000 could provide a strong base for Nifty. In the case of a BJP-led coalition government, UBS predicts the market to sustain current valuations.
In this case, the range for the market would be between 9,400 on the lower side and 11,300 on the higher side. If the Congress-led coalition comes to power, the global investment bank expects the market to get re-rated, though ‘actual policies would drive price multiples later’. However, if the third front government comes to power, UBS expects the market to get re-rated and drift towards 8,200 on the lower side; the higher side will remain capped at 10,000.
While a decisive mandate will be taken positively by investors, past data reveals that a coalition government wouldn’t be a big negative for the market: both from policy perspective and returns. In fact, some of the seemingly unstable coalition governments – P V Narasimha Rao and UPA-1 – have delivered better policies and fairly robust levels of market performance. The radical restructuring of direct tax rates under then finance minister P Chidambaram was done during the reign of United Front government under H D Deve Gowda.
Though Gowda’s government did not last beyond nine months, it did not disappoint investors. Still, the market’s worst fear about the outcome of a general election has always been coming together of smaller parties to form a coalition government. While most market veterans would want the re-election of Narendra Modi government with absolute majority, one of the possibilities of a perceived unstable government coming to power cannot be ruled out.
Does this mean that there is a downside risk to governance which will impact returns on investment in case a non-BJP or non-Congress government comes to power? Data of past seven general elections over 27 years suggests that investors need not fear an unstable coalition. The market does get a jolt but after initial knee-jerk reaction, market moves on, driven by economic fundamentals and policy interventions.
Remember the 2004 general elections when the Vajpayee government lost to Congress-led UPA-1? The market reacted adversely with 20 per cent down circuit on the day of the results. Subsequently, the first four years of the UPA government turned out to be one of the best years for economy and equity market, till the Bull Run was hit by the 2008 US financial crisis. However, the euphoria around the coming back to power of UPA-2 in 2009 did not deliver similar returns over the next few years.
This was partly because of turmoil in global economy after the financial crisis, which impacted emerging economies and financial markets. Muted performance was also witnessed after the re-election of a perceived stable government under A B Vajpayee in 1999, though it is important to mention here that the dotcom bubble of 1999-2000 had severely affected global financial markets. If one goes purely by historical data, then the so-called unstable coalition government from 1989 to 2014 have not disappointed investors.
In fact, during this period, the equity market went up 14 times: from 1,001 points on the Sensex in July 1990 to 24,000 in May 2014. India’s healthy economic growth since 1991 has helped its equity market become the seventh largest market by size, with market capitalisation of over $ 2 trillion. Market cap typically moves in tandem with economic growth and, according to financial experts, it has room for improvement as India’s market cap-to-GDP ratio at 77 per cent is below the world average.
According to Morgan Stanley, the market cap of Indian equities is likely to hit $6.7 trillion by 2027. That may be an ambitious target, but the point is: with around 6 to 7 per cent growth as the new normal, if India’s GDP touches $5 trillion by 2027, it will be reflected in buoyant capital market conditions. So, the fear of a coalition government coming to power could prove to be misplaced.
A L I Chougule is an independent senior journalist.