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4 Things To Watch Out For After Modi's Landslide Win In UP Polls - Outside View by PersonalFN

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4 Things To Watch Out For After Modi's Landslide Win In UP Polls
Mar 15, 2017

Do you enjoy watching one-sided matches?

Nobody does.

But when it comes to equity markets, it seems they prefer unanimous victories in political battles.

In the recently concluded state assembly elections in 5 states, BJP is likely to form the Government in 4 states, while Congress will be in power in the remaining one.

BJP's performance in Uttar Pradesh has been even better than the most optimistic estimates. A landslide victory in the India's most populous state opens the floodgates for the Lok Sabha election 2019. Many political experts believed state election in Uttar Pradesh was the Semi Final match for the BJP-which it has won quite comfortably.

And, as a response to this triumph, investors splashed champagne and burst crackers on the Dalal Street. CNX Nifty touched an all-time high of 9,122 points when the markets opened for the first time after the results were announced.

Now the question is-is this optimism warranted?

Besides the improved chances of Mr Modi in 2019 elections, the 'bulls' believe that BJP's tally in the Rajya Sabha is going to improve substantially in 2018. This will help the Modi Government pass significant legislative reform-a big positive for the Indian economy.

Let's understand this math...

At present, Congress is the largest party while Samajwadi Party is the third largest party in the Rajya Sabha.

Changing equations in Rajya Sabha?
Political Party RajyaSabha Strength
Indian National Congress (INC ) 59
Bharatiya Janata Party (BJP ) 56
Samajwadi Party (SP ) 18
All India Anna Dravida Munnetra Kazagham (AIADMK ) 13
ALL INDIA TRINAMOOL CONGRESS (AITC ) 11
Janata Dal (United) (JD(U) ) 10
Biju Janata Dal (BJD ) 8
Communist Party of India (Marxist) (CPI(M) ) 8
Nominated (NOM. ) 8
Bahujan Samaj Party (BSP ) 6
Data as on March 14, 2017
(Source: Rajya Sabha)

In 2017, only 10 Rajya Sabha seats will be up for elections, of which six will be from West Bengal. Almost all of them will be shared between AITC and CPI (M). Out of the four remaining seats, Gujarat's share will be of three, and one will go to Goa. In other words, as far as the tally of top three parties is concerned in Rajya Sabha, there won't be a major change in 2017.

However in 2018, things might change quite dramatically as 68 seats will be vacant. It's noteworthy, 10 will be from Uttar Pradesh. Congress and Samajwadi Party are likely to lose out to BJP in a numbers game. BSP will also be at a loss. BJP will become the single largest party in Rajya Sabha in 2018. Unlike Lok Sabha elections, Rajya Sabha elections are predictable because we know the scorecard of parties in states.

If you take the projections of a slightly longer time horizon, say till 2019, 79 seats will go into elections. Of these 23 seats belong to BJP and allies, while 21 seats belong to Congress.

If BJP's winning horse continues to gallop in State elections, at some point, BJP's strength will increase dramatically and decisively.

In the past, it's been observed that despite having a majority in the Lok Sabha, a lack of mandate in the Rajya Sabha hindered the passage of many crucial Reform Bills. As expected, if Modi Government gets the second term and BJP and allies expand their base in Rajya Sabha, the Government will drive in the top gear, as far as the passage of crucial Bills are concerned. The decisive mandate in both houses is imperative to take bold economic decisions.

This means, nothing is changing soon; although, the outlook on the political stability and policy front seems to be improving. Markets might enjoy premium valuations because of these two factors.

However this being said, in the short to medium term, factors such as corporate earnings, global growth outlook, and changing geopolitical equations across the globe will be the key drivers of Indian markets.

4 factors that you need to keep an eye on

  1. How fast does the Federal Reserve (Fed) in the U.S. hike interest rates. It has hinted at increasing rates 3 times in 2017. If it becomes more hawkish, equity markets across the globe will be negatively affected.
  2. It also remains to be seen how the global economy fares when the anti-globalisation sentiment is gaining popularity in developed economies.
  3. In this context, how (Modi-fied) India performs on the growth front with job creation and inflation control will remain crucial.
  4. Will Indian corporations benefit by the expected improvement in the decision making-something that remains to be seen.

The fact that many market participants including mutual funds and Foreign Institutional Investors (FIIs) are cautiously optimistic at present denotes that, we are not going to have runaway rallies in the near term.

If big bang reforms kick in, for example, dilution of Government's stake in Public Sector Banks (PSBs), markets may witness massive rallies-since it will confirm that, with the improved political mandate, the Government can deliver tougher reforms.

What should investors do?

You would be better-off not following the momentum and invest as per your personalised asset allocation factoring in your financial goals and risk appetite.

If you are a mutual fund investor, you should opt for the Systematic Investment Plans (SIPs) offered by mutual fund houses. With an SIP, you not only benefit from the market volatility, but also eliminate the risk associated with timing the market.

Further, when you select funds, be careful. Prefer those mutual fund schemes which follow strong investment follow robust investment processes and systems as against those indulging in momentum playing.

At the time when, portfolio construction has become difficult even for the long term investors, you may like to take help of a Certified Financial Guardian (CFG), who is a symbol of trust and respect.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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