Markets Chant NaMo Namaha

A clean sweep in three states and a very near-to-power situation in the last one is something that was much beyond the best of expectations built around these elections. The BJP secured a thumping victory in Rajasthan and Madhya Pradesh securing 162 and 165 seats out of the total 200 and 230 seats respectively. Chhattisgarh, where it went neck to neck with the Congress finally fell into its lap as the day drew to a close by winning 49 of the 90 seats. But the most interesting contest happened in Delhi where it won 31 seats falling short of a majority by just about five seats.

Politically, this has been an election where one name has been driving the entire course – Narendra Modi. The man is being bandied about as the next Prime Minister of India if the BJP comes to power and has been a very crucial element in the BJP moving from strength to strength not in just one but all the four states which went to polls. In fact the emergence of the Aam Aadmi Party has come as a surprise in these polls. Had it not been for the breakaway of the votes by this new outfit, the BJPs win in Delhi too would have been a certainty. The disillusionment of the voters with the Congress’ paralytic approach to governance and the vibrancy of Modi which has been playing out well for the BJP would have anyways ensured the decimation of the Congress from Delhi.

One key takeaway from the election results is that the electorate isn’t really taking the populist measures of the incumbent central government very seriously. Had it done so, the votes would have swung in favour of the ruling UPA rather than going decisively against it. The Land Bill, the Food Security Bill and all the promises of a bright future for the masses have either fallen on deaf ears or the electorate has become more intelligent than our policymakers thought they were. As a consequence, the Congress now has a lot of ground to cover afresh before the Lok Sabha elections, while on the other hand, the BJP will now up the ante against the central government, pushing it on the backfoot.

Call it a washout of the Congress or a landslide for the BJP, it augurs well for the markets, at least for now. The bulls are charging madly and are giving the bears a mauling. Following these results, the dream of a stable government at the centre, with a strong and decisive leadership looks like a clear possibility. Foreign investors are certainly going to look at India a bit differently, now that they have a clearer indication of the change that can be expected in May 2014. They have been openly voicing their vote for quite some time now, which has also put the ruling party in a bit of discomfort. FIIs will now come to India even more confidently, and all this means a huge market rally in the days to come.

The first signs of the bull rampage have become evident in the past week itself. The benchmark indices hitting their lifetime highs should not come as a surprise to many. The euphoria over the BJP’s win has reached a point where reports have begun pegging the market (read the Sensex) at 24000 points soon. These expectations may not seem to be unrealistic, at least as of now. The pessimism shrouding the markets has been swept under the carpet and it looks all set for the next big leap. The argument about a change in fundamentals does hold good even at this point in time, but its weightage certainly calls for a re-rating. That re-rating has already begun and will continue over the near term preceding the general elections. Remember, the markets always discount the future expectations. Whether that discounting is coming in a tad early is anybody’s bet.

One school of thought says that the outcome of the general elections can sometimes be diametrically opposite to that of the state elections. But things certainly look different this time around. The wave is not just against an insipid and fragmented leadership, it is also about putting in place a more dynamic and comparatively younger leadership, and of course one that can lead from the front. Today, a BJP government, under the Prime Ministership of Narendra Modi, is being looked upon as possessing all of these characteristics as opposed to the divided house that the UPA is presenting.

The markets have seen through this, and the noise emanating not just on the domestic side but also on foreign shores is a sure sign of it. From the Goldman Sachs to the Nomuras of the world, all have directly or indirectly voiced their eagerness to see a Modi-led BJP government at the centre. That speaks a lot about how Modi is being looked upon as the new messiah of the markets. Not in decades has a political figure, especially of a right-wing nationalistic establishment, been looked upon as an economic saviour and a harbinger of good times for the markets.

But there is a flip side to this positivity. Remember, we are still good five to six months away from the general elections. After the drubbing that it has received, there is no scope of the incumbent government going to polls early. In these five months, the BJP, which is much invigorated by the state results, will ensure that no major populist initiatives get passed at the centre easily. All this effectively means that the economy can be expected to keep trudging on with difficulty until the new government assumes power and releases it from its shackles.

What we are witnessing is a sentiment-driven rally boosted by the positivism of the state election results. This will go on for the next couple of months or so. Of course, do bear in mind that even that could come to an abrupt halt if the US messes with the market’s head with its taper talks.

The bulls, which had been raring to go, are grabbing the bears by the scruff of their neck. The markets’ exuberance over the elections results is not likely to ebb soon. However, it would be good to take note of the caveats before jumping full on into the poll celebrations. A feel good rally is what will continue over the next few days or probably weeks. Just hope that it extended into the months and years ahead.