Quantum View: India Awaits Election Outcome Friday, May 17, 2019
On May 23rd 2019, after a 7 phase election spread over more than a month, we would know whether - 1) Narendra Modi of the Bharatiya Janata Party (BJP) will get a second term as Prime Minister or 2) the grand ‘old’ Congress party led now by its ‘young’ 48 year old president Rahul Gandhi would once again come back to power or 3) the diverse Indian voter base would have voted in such a way that a non-BJP, non-Congress motley coalition would stake majority and form the government, something which hasn’t happened since 1996.
That all the 3 possibilities are still bandied about with only the last phase of voting remaining is indicative of the fact that this election result which was a foregone conclusion in favor of Mr. Modi and his party about a year ago, is bitterly close and is being bitterly fought.
We do know that Election Results do not matter to long term economic growth and the Indian economy chugs along at its 6.5% - 7.0% (old series) potential GDP growth despite and in spite of any form of government at the Centre - Coalitions, strong mandates, weak mandates, right winged, left dominated...
But asset prices (Equities, Bonds and Currency) do and can react in the short term and thus we will have some severe hyperventilating from the evening of Sunday May 19th when EXIT Polls are due to be released till Thursday 23rd when the final results are actually announced.
Option 1 and Option 2 are KNOWN KNOWNS for the markets as the ideologies, the policies and the people of these two parties are known to the investors. The markets may still react negatively on Option 2 but within time the asset prices will move towards fundamental realities and long term trends, opportunities and risks.
Option 3 is an UNKNOWN UNKNOWN. The policies, the ideology and the people in the government would be known to investors only over time and markets may react negatively and for a longer period of time until convinced otherwise.
For Indian Bond market, given that interest rate changes are now set by a Monetary Policy Committee (MPC), government influence on rate decisions are that much lesser. But the key drivers for Indian Bond Markets out of governments is their view on Fiscal Prudence and the desire to keep inflation under control.
Fiscal Consolidation and the goal to reach 3% Fiscal Deficit / GDP remains elusive and we would caution investors from expecting it from any government in the near term.
The BJP though has traditionally shown a stronger desire to keep inflation under check than the Congress.
The Indian bond markets are currently attractively valued on both nominal and real terms with the 10 year government bond yielding ~7.4% (semi-annualized); the 10 year AAA PSU at ~8.4% (annualized) at a time when CPI is forecasted by the MPC to average 3.4% over the next year and the Repo Rate is at 6%. The uncertainty of the election result is probably bearing on market yields. The Bond Market also remains expectant of some monetary policy action, rate cuts and liquidity infusion. We expect RBI to ensure that system liquidity remains in surplus mode but that need not necessarily alleviate the credit situation of stressed NBFCs and corporates.
Data Source: CCIL & NSE
Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
Mutual fund investments are subject to market risks read all scheme related documents carefully.
Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.