Where will Markets go from here?
17 MAY 2014
- By Asad Dossani, Author, The Lucrative Derivative Report
The BJP has created history with their strong performance in this election. The election has seen the best performance in the BJP's history, and the worst performance in Congress' history. In recent years, we have gotten used to economic pessimism as growth has fallen considerably during the last years of Congress rule. The mood following this election result is markedly different. For the time in recent memory, economic optimism is the majority consensus.
What does all of this mean for the financial markets? One major difference between this election and previous ones is that market volatility is much lower today than during past elections. In the 2009 elections, the Indian stock markets rose 17% in the two days following the results. In the 2004 elections, the Indian stock markets fell 17% in the two days following the results.
In the single day of trading in the election, the Indian stock market is up around 1%. The rupee is up around 0.5%. This is positive performance for sure, but considerably less volatile than past elections. The financial markets have behaved very differently in this election as compared with past elections. Why is this the case?
The first reason is that markets have made large moves in anticipation of the results. The Indian stock markets have hit record highs, and the rupee has appreciated considerably, all in an anticipation of a BJP victory. The election outcome is largely what the markets predicted in the first place. As a result, markets have reacted in a calm way to the election results.
This is not what happened in previous elections. In the previous two elections, the election outcome was different to what markets and forecasters expected, and so high volatility resulted. This time, the outcome is largely along market expectations.
What can we expect for the markets in the near term and long term? In the near term, we may experience some elevated volatility next week. It is unlikely to be as volatile as previous elections, but it will still be more volatile than normal. Furthermore, we should expect some profit taking as the market has increased a lot in anticipated of the election results.
In the medium to longer term, the financial markets will depend on economic performance. Whether the government can deliver a strong economic performance remains to be seen, but expectations are certainly high. It is important to keep in mind that change always takes time. If the new government is successful in improving the economy, we will see this over the course of a few years, rather than a few months. While we should be optimistic, we should keep our expectations realistic. And hopefully five years from now, our economy will be much stronger than it is today.
In the Equitymaster club forum, we are asking the question: "When do you expect our economy to perform at its full potential?" We invite you to please post your views.
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