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Bihar Elections and the Madness of Mr Market

Sep 28, 2015

In this issue:
» Is market volatility making you nervous?
» Is this the beginning of a new era for commodity markets?
» Market roundup
» ....and more!

00:00
'BJP's Bihar election victory to be a shot in the arm for stock markets', read a headline in ET.

The news report said that, other than global factors such as the US interest rate hike and the turbulence in China, the Bihar elections were a key concern of equity market participants.

That got me curious. I wanted to understand how state elections in Bihar could affect stock prices. I read on: Some market participants feel that a decisive BJP victory in Bihar would provide the much needed moral boost and lift market sentiments.

Some even believe that a BJP win in Bihar could influence the state elections in Uttar Pradesh next year. If the BJP can win more seats in Uttar Pradesh, it would result in increased Rajya Sabha seats. This, in turn, could set the stage for the passage of crucial economic reforms that India needs to unlock its immense economic potential. And if all of these events happen as expected, it could result in better growth prospects for Indian companies.

What does this mean? How should you as an investor think about the Bihar elections?

Before I tell you what I think, let me tell you a little about a certain weird man that I know. This man suffers from bipolar disorder. He goes through extreme mood swings from time to time. There are times when he feels on top of the world. And there are times when he finds his life sinking into a bottomless pit.

His extreme mood swings suggest that he is highly impulsive and distracted...reacting to every tiny event that happens around him. He mumbles all the time, but seldom makes sense. No wonder that his life has always been turbulent and erratic.

The other day when he was walking in the park, he saw one tiny, dark cloud in the distance. He started running frantically towards his house. After about 30 minutes he returned with an open umbrella. With a proud, toothy grin, he went around telling people that it was going to rain soon.

Well, the dark cloud was just a puff of smoke from the nearby factory. But this gentleman is so sentimental, he seldom cares about facts.

Doesn't this man sound like our very own Mr Market? Often, investors take the idiosyncrasies of Mr Market too seriously without realizing that the gentleman suffers from a plethora of mental disorders. If you give too much importance to his whims and fancies, you are bound to make mistakes. The intelligent investor understands that Mr Market is incapable of thinking long-term. He is always jumping from one tiny bit of news and information to another.

The simple solution is to not pay too much attention to Mr Market's daily mood swings.

Coming back to the Bihar state elections... I am not saying that the stock markets are isolated from political outcomes. But it does not make practical sense to give them too much importance. Can you accurately predict who will win the Bihar elections? Can you accurately predict how this will influence the elections in Uttar Pradesh next year? Can you be certain that these events will indeed result in the passage of crucial economic reforms? Even if you manage to predict all these outcomes accurately, how will you quantify the impact on the earnings of individual companies over the next 5, 10, or 15 years? In short, predicting election outcomes makes absolutely no sense to long term investors.

As an investor, do political outcomes impact your investment decision making? Do you think stock prices will go up if BJP pulls of a decisive victory in Bihar? Let us know your comments or share your views in the Equitymaster Club.

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02:20
 Chart of the day
Indian stock markets proved to be the best asset class in 2014. With around 30% returns, the Sensex performed the best since 2009. However, much of these gains rested on a shaky ground. Instead of a real recovery, what stocks were riding on were market expectations driven by Modi fever and foreign money inflow. It did not take too long for reality to dawn on markets. With corporate earnings showing no signs of recovery and foreign money leaving shores, markets have witnessed a correction in the year till date. As per an article in Businesstoday, the equity investors have lost around Rs 2.95 trillion this year. The recent sell off on August 24th this year is a stern reminder of vulnerability of the markets to global developments. However, the losses, just like the gains, were more driven by global factors rather than stock specific fundamentals. As history suggests, stock markets in the long term has been one of the best asset classes. Over the same economic cycles, there have been businesses that have thrived to become that have been wealth compounders. And then there are businesses that could not even survive. It was not the global factors and market sentiments, but business specific fundamentals that differentiated winners from losers. As such, long term investors would do well not to focus too much on the former but follow a bottom up approach of investing in stocks.

Is Mr Market Making You Nervous?

03:30
It's an important day for commodity derivative markets in India. Notorious for manipulation and speculation, the Forwards Market Commission will merge with SEBI. The former, despite existing for around 6 decades, has lagged much behind SEBI which is not even half its age. It has been more in the news for wrong reasons, most notable of which was the NSEL scam. While that was unfortunate, one good thing that has come out of it is this merger.

So what should one expect of this merger?

As an article in Economic Times suggests, one thing will be making commodities more liquid. And then to avoid distortions so as to ensure efficient price discovery and becoming a means of insurance against price risk. If the merger works well, it is likely to lead to not just higher production, but better quality as well. It may even promote private investments. But all this is easier said than done. It will be a big responsibility on SEBI's shoulders to not just supervise and regulate the stakeholders involved, but make sure that benefits flow to farmers and consumers.

04:35
At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 50 points or 0.2%. Gains were seen in realty stocks while metal stocks were trading weak. The Midcap and smallcap indices were also trading firm.

04:45
 Today's investing mantra
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).

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7 Responses to "Bihar Elections and the Madness of Mr Market"

V.JEGANATHAN

Sep 29, 2015

The economic growth is to be accelerated, then the required legislations/bills to be passed in the houses for which the required mandate is required,there the Bihar election plays a vital role. Of course, an investor in capital market, one should give more importance to the fundamentals of a company, its growth, its rewarding capacity, longterm strategies are playing crucial role. Hence, both are necessary.

Like 

Kunal Basu

Sep 28, 2015

It is absolutely right that the Bihar Election will influence the market. The political situation is that the opposition is bent on preventing crucial economic reforms no matter how many amendments are introduced.

GST will aid in doing business in India and the present Land acquisition bill has delayed many important projects.Hence both the elections are important.

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RANJIT SARKAR

Sep 28, 2015

B J P & ALIENS WILL WINN.

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Anil Agrawal

Sep 28, 2015

I am not saying, whether market should be affected by Bihar Polls or not. But it is certain, that market will move up, if BJP gets decisive mandate in its favour in Bihar. Just like it went up- when BJP got absolute majority in Lok sabha elections.

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K Laxminarayana Rao`

Sep 28, 2015

A B J P win in Bihar election may improve the sunsex temporarily. But B J P's main agenda is not reforms but consolidating power and, staying in power firmly an dthen pursue Hindutva agenda, that is making India 100% Hindu Nation and then world. This has been stated by them in various forums. Once the market becomes aware of this properly it will collapse.

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C K VAIDYA

Sep 28, 2015

After giving a thumbs up to the new government at the centre, the market has been expecting major reforms which are currently not going through due to politics. Even GST which UPA had introduced and for which UPA worked hard is not being passed because the UPA does not want the present Government to get credit for GST.
Under the circumstances, a win in Bihar and consequent improvement in Rajya Sabha is expected to boost the prospects of reforms getting through. Hence, I expect that a victory in Bihar will boost the market.

Like 

Pradip Shah

Sep 28, 2015

Yes, Bihar election will have long term repercussions not only at centre but also in next year UP state election. If the result is positive in favour of NDA government , there would be positive impact overall including Stock market as there would be better coordination & synchronization between centre & state & vice versa. It could result in more Rajya Sabha seat ,which could result in passage of crucial reform bills.

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