Home Market Will Gujarat Election results be an acid test for the market?

Will Gujarat Election results be an acid test for the market?


By Nishanth Vasudevan

Will the Gujarat elections be a watershed of sorts for the stock market? As the bull run continues uninterrupted into the fifth straight year, many on Dalal Street want to believe that it would be business as usual even after the election results.

Their belief of such an outcome is plausible, given that the market has emerged unscathed from bursts of sudden negative news flow — globally or locally — in recent months. But it is worthwhile to consider the possible consequences of the BJP's performance in the Gujarat elections.

Of course the stock market wants BJP to continue ruling Gujarat for the sake of political stability. So, it came as no surprise when the market rebounded recently after pre-poll surveys suggested a BJP victory in the state, the home turf of Prime Minister Narendra Modi. Less than a week before the verdict, however, there is some nervousness simmering beneath the surface.

The importance of Gujarat poll results stems from the perception that the government's policies in the coming months would depend on the outcome. Exit poll results will be out on Thursday evening, and the actual results will be announced December 18.

There is little doubt that the market will react adversely if the BJP loses or performs worse than expected in Gujarat elections. How much damage these outcomes will inflict on the market is open to debate, however. But investors could do better by being constructive on the market in such an event. A scenario that could play out here is this: The Sensex and Nifty decline 10-15% over the next few weeks with investors worried that the government wounded by BJP's electoral disappointments would step up spending to resuscitate the economy. In the Union Budget for 2018-19, the government surprises the market with a lowerthan-expected fiscal deficit target, while sharpening its focus on the spending programme aimed at reviving the economy.

This will be the confidence the market needs, triggering the next bout of the bull rally. It will, however, change the way investors perceive risks in the market, an aspect that has been widely ignored in recent times, given that 2018 will be an election-heavy year.

Now, let us assume that the BJP registers a comprehensive victory in Gujarat.

The euphoria could carry the markets to new highs immediately. But there is a likelihood of investors soon seeking an answer to the question: What next? There is a possibility that the market starts getting nervous in the run-up to the Budget. Some senior market participants believe that BJP's victory in Gujarat may embolden the government to consider measures such as bringing in the long-term capital gains tax for stock market transactions in some form to make up for the shortfall in GST collections.

Such a move will dampen sentiment in the short run, but the bigger question would be the impact the move may have on the ongoing shift in savings to equity from gold and real estate. Stock market intermediaries might want to believe the impact would be minimal but it is still an untested territory.

In short, if the first scenario plays out, it could be a case of 'short-term uncertainty and longer-term gains' for the market. In the event of the second scenario, it could lead to 'short-term gains and longer-term uncertainty' in the market. At this juncture, few in the market want to stick their necks out on the possible outcome. If the Satta Bazaar prices are anything to go by, the game is still wide open.

Original Article

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