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Will Political Turbulence Batter Samvat Year 2075?

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With Lok Sabha election 2019 approaching relentlessly, speculations over political vexation impacting new Samvat year are hovering around. The eyes of investors will be firmly focused on every political twist and turn, and the uncertainty will tell on financial markets for much of Samvat 2075.

The point of divergence between Samvat 2074 and 2075 is that the former started with political perturbations. Demonetization and GST left the market under shock for a considerable period of time.

For most of the year, the country’s macroeconomic environment was stable, but then fears of a trade war between the US and China started haunting investors.

Domestic institutional investors kept pumping funds into the stock market. On the other hand, foreign investors sold Indian shares as they were cautious given the expensive valuations and the falling rupee. Towards the end of the year, a number of weaknesses on the macroeconomic front—higher oil prices, a weaker rupee, a bloated current account deficit—were revealed, dragging down the markets.

As mentioned earlier, domestic politics will rule the markets. Assembly elections in Chhattisgarh, Madhya Pradesh and Rajasthan—where the Narendra Modi-led Bharatiya Janata Party (BJP) is in power—will provide the market more clarity about the BJP’s prospects in the general election next year.

Among global factors, while the oil price-rupee depreciation tango has wreaked havoc on our markets, there has been some respite recently. But it’s open to question how long that respite will last. The US economy continues to power along, with wages too gaining traction, which is likely to lead to faster-than-anticipated rate hikes by the US Federal Reserve. That is likely to keep the dollar strong.

Nobody can tell for sure about oil prices, but the fact remains that the Iran-US sanctions issue is far from settled. If the trade stand-off between the US and China is resolved, it would be a huge relief for emerging market equities. But because India was seen as relatively immune to the US-China trade conflict, any positive development on this front would be a sentiment booster at best.

As far as the domestic economy is concerned, political uncertainty may lead to a holding-back of investment decisions. Revenue collections from GST have been far from satisfactory and provide little respite to the country’s fiscal position. In fact, some economists believe that even though GST collections crossed the ₹1 trillion mark in October, a fiscal miss looks unavoidable. Add to that the worries on the current account deficit and on higher interest rates.

The fallout of higher oil prices and interest rates on corporate earnings was visible in the September quarter results of many companies in the form of margins being squeezed. This has led to more downgrades, delaying the hopes of the much-needed earnings revival.

Meanwhile, in the near term, investors should not overlook the ongoing turmoil in non-banking financial companies.

In short, in a year loaded with important political events coupled with a challenging macroeconomic environment, a key theme that will rule the Indian stock market would be increased volatility.

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