Millennium Post

Narendra Modi fever grips market

It was time for the stock market to strike back. Last Monday, soon after it opened in the aftermath of the announcement of the complete election results and complete rout of Congress in four Hindi heartland states, the market gave a fitting reply to Congress bigwigs’ recent tirade against foreign investors’ exuberance over the possibility of BJP forming the next government, by pumping in large investments in Indian stocks resultantly  pushing up the market to new highs and reiterating foreign investors’ support for Narendra Modi, BJP’s prime ministerial candidate in the coming Lok Sabha polls. Over half-a-billion dollars of overseas funds were invested in the market by foreign institutional investors (FIIs) in one of the biggest single day operation by external entities as both brokers and investors gambled on a  ‘clear majority’ for BJP in the 2014
parliamentary election.

Some likened it to an act of treachery on the part of FIIs, which owe their overwhelming presence in India’s secondary market to foreign investment-friendly policies of successive union finance ministers representing the Congress party. But, the truth is FIIs have long dumped the Congress government as non-performing. Having invested nearly $200 billion in Indian stocks over the years since the country’s IMF World Bank prompted economic reforms, the priority before foreign investors is now investment protection rather than supporting a non-performing government, facing one after another investigations into massive corruption charges. Ironically, even some of India’s top business houses, which have made billions from the government’s pro-big business policies, too have joined hands with FIIs to celebrate a possible Congress defeat in the coming national election by investing large sums in stocks to help lift the market to new highs in keeping with the mood of the general public.
The charge of the foreign fund brigade was predictably led by global investment bank major Goldman Sachs, which attracted ire of Union Industry and Commerce Minister Anand Sharma among other senior Congress leaders for linking the latest surge of Sensex and Nifty, two most important stock indices, with a forecast of Narendra Modi-led BJP forming the next national government after the election. Sharma had snubbed Goldman Sachs for its unwarranted interference in domestic politics. Leading FIIs had predicted, even ahead of pre-poll media surveys, a Congress rout in Hindi heartland and the return of BJP at the Centre after Lok Sabha polls. Their forecast came to be true except in Delhi, where BJP failed to return despite the rout of Congress. It seems the market gauged the public sentiment even better than the media and, of course, of those Congress party leaders. There is a great possibility of the market remaining firm, barring periodical profit bookings which are normal, until the next election and experience another big bull run if Narendra Modi-led BJP forms the government. But, there is an equal possibility of the bubble getting bust if the Lok Sabha election results fall short of the market expectation or its shrewd calculations. The latest election results in Rajasthan, Madhya Pradesh and Chhattisgarh should not be misread as a possible trend in other parts of the country, including larger Hindi speaking states of Uttar Pradesh and Bihar, where regional parties are much stronger than BJP. The Modi brigade is most unlikely have much presence in Southern states, barring possibly Karnataka. The same is the case of two major eastern states of West Bengal and Orissa. In 2004 Lok Sabha elections, BJP did very well in Rajasthan, Madhya Pradesh and Chhattisgarh but mostly trailed in other populous states.
Therefore, the FII-controlled market’s political forecast need not be taken too seriously by domestic investors, especially the retail segment, as it appears to be a high-risk gamble in the absence of any fundamental change in the outlook of India’s economy, which will continue to be bearish for want of large on-ground investment boosters from the cash-strapped government in the fag end of its term. The Congress-led UPA government will at best perform somewhat like a lame-duck administration with its political opposition strongly challenging all its economic measures and fresh infrastructure and investment reforms in a belated bid to bounce back. As a result, economy is likely to get further weakened in the coming months although food inflation may temporarily ease until the middle of April. Generally, December-April represents India’s biggest agriculture and harvesting season. The inflationary trend is bound to peak post-April, next year, portending evil for the economy, retail investors and the UPA government, though not necessarily to the sole advantage of BJP.

Indian economy, at its present state, has no special dream to offer. Yet, next two months are likely to witness a sharp rise in mutual fund (MF) offerings and corporate IPOs and repeat offers. This should not fool retail investors, who have already suffered big losses from highly underperforming MF schemes for nearly five years in the running. If the existing funds flare up, it may be time to sell units and invest the proceeds in tax-free PSU bonds or in mid-term bank fixed deposits offering attractive interest schemes. Incidentally, most active mutual funds are also FII-controlled and subject to price manipulation. For domestic retail investors, caution is the key. They should take very seriously the statutory warning in fine print that ‘mutual funds are subject to risks and investors should read the offer document carefully’.

Both stock market and universal franchise are big financial and political gamble for respective players where sentiment and winds of change often blow in scientifically unpredictable pace and direction. IPA
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