Looking to Next Week – Indian Election & Indian Stock Market


Remember the last week of August 2013? There was gloom in India and ridicule in the world. The Indian Rupee and the Indian Stock Market were falling like a rock. All hope seemed lost. That was the perfect time to remember the message from the Stable Buddhi Section of Chapter Two of the Bhagvat Geeta (Verse 69):

           या निशा सर्व भूतानाम तस्यां जागर्ति संयमी
          Yaa Nishaa Sarva Bhutaanaam Tasyaam Jagarti SamYamee
          In what is Night to all people, the Balanced One Stays Wide Awake
     

The financial markets usually follow this message of the Geeta even if most Indians don’t. At the worst of that decline, the Indian stock market and the Indian Rupee turned just as the darkness of night turns into the radiance & hope of Devi Ushas, symbolized by the Dawn.

We pointed out this turn to our readers in our article on Saturday, August 31. The Indian stock market has not looked back since that day. The purchase of EPI, the WisdomTree India ETF, on August 28, 2013 (featured in that article) has resulted in 50% gain as of this Friday, May 9, 2014. And what glorious action did the Sensex deliver this Friday – a rally of 690 points or almost 3% in anticipatory celebration of Narendra Modi’s election victory.

Over the past several weeks, we have featured upgrades of Indian stocks & Indian economy by American financial firms and analysts. Last week the British Financial Times also joined the parade. Accolades continue to be showered on Narendra Modi and what he could mean to India. The final salute came on Monday, March 5 from Barron’s – the widely read financial weekly in America.

Frankly, this bothered us. An old tenet in investing teaches that magazine covers tend to be contrary indicators. They often prove to be signals that a story has reached a peak of acceptance and assimilation.  Look what happened this week to Whole Foods, a food market company fulsomely praised by Fortune Magazine – their stock dropped by 19% this week on missing earnings. This is a classic example of the magazine cover indicator.

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Remember that the Indian stock market tends to exhibit wild & crazy moves the day after the election. As we recall, the Sensex fell by 10% when the 2004 election results were announced and rose by 17% when the 2009 election results were announced. So no one can predict what will happen this Thursday & Friday. The entire country and frankly much of the world is waiting with anticipation because the stakes are so high. The stock market volatility can begin early in the week when the exit polls come out on Tuesday, May 13.

If Mr. Modi and his NDA alliance get the 272+ seats required for a majority, euphoria will reign. If they win less than 200 seats, we could see gloom. Because that would mean the launch of the classic Indian election bazaar where parties & politicians start making deals. Remember Mr. Modi represents an existential threat to the current corrupt political practices in India where all parties share in the loot.

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This cartoon perfectly illustrates how other parties and politicians will come together to prevent Mr. Modi from taking the reigns of the new administration. If they succeed, you will see a short term disaster in the Indian stock market, the Indian economy and in India. Just look at what happened in Delhi earlier this year after a hung local election.

We turned to a veteran observer of Indian elections, Mr. Kumar Ketkar, to get a clearer picture of how the post-election process might unfold. No one who knows him or has heard of him would mistake Mr. Ketkar for a supporter of Mr. Modi, his platform or his approach. But Ketkar is a smart, insightful, and rational analyst. As he wrote to us a few days ago: 

  • Modi will have to be invited to form the government as his party and Alliance will be the largest in Loksabha. He will have to prove his majority in the House. He can achieve it by orchestrating absence and abstentions of some members. Once he establishes that simple majority, he can carry on for six months without facing any no-confidence motion.”
  • “During those six months he can woo some parties, some members, and also can organize a split in the Congress. No MP will want fresh election and hence he can continue even for five years, though that will require trapeze skills.”
  • “On May 16/17, Sensex can zoom to 25,000 and that will further embolden him. In the first six months he could initiate some popular, some populist and some neo-liberal business friendly policies. That will get him media support and international acclaim.”
  • “A new level of frenzy, not seen before in the country, will envelope politics.”

Ketkar’s target of 25,000 will be easily exceeded if Mr. Modi wins the majority with 272+ seats. If he wins in a landslide like Indira Gandhi’s 1972 victory, then you might see a rally of volcanic proportions. Such a rally will in all likelihood be sold because reality will not match euphoria at least in the short term. Frankly, Mr. Modi will face difficult hurdles in driving his economic reforms through the morass of the Indian system that has been trained for 60+ years to maintain the corrupt status quo.

Getting back to the Indian stock market, remember the old adage attributed to Ben Graham, the legendary value investor, the mentor of Warren Buffett:

  • “In the short run the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”

If Narendra Modi delivers to India even 50% of what he has delivered to Gujarat, the stock market rally that began in August 2013 will become a secular bull market for the next generation. India has everything else – great demographics, a deep entrepreneurial business class, a tolerant & democratic culture. All it needs is a smart government that is dedicated to delivering good governance & prosperity to people, a government that understands the dictum from “ArthaShastra” of the great Indian strategist Vishnu-Gupt Chanakya, the earliest known treatise on economics, politics and government:

प्रजा हितेन राज्यस्य हितम्
Praja Hiten Rajyasya Hitam

Success of a government stems from success of the people

Narendra Modi has proved that he truly believes this. That is why we think his victory in this electi
on will finally deliver the Sangam or union of great macro and India’s already great micro.

* Like many Sanskrut words, Hitam is a word full of deep analytical meaning – colloquially it means beneficial. So in the political context, it means development, material prosperity, law & order, and ethics. Here we integrate that into one word – success.

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