Politics and the stock market

I was recently asked about the impact that national politics had on the domestic stock market in India and here’s my 2 cents on it.

A stable government can exert considerable influence on the economic policy decisions of a country as we’ve recently seen in reforms like GST, IBC, etc or even demonetization or bank recapitalization. However, the expectation that a strong government, as seen in the aftermath of the 2014 general elections, will revive economic growth, is a hope at best.

Underlying weakening fundamentals like over leveraged corporate balance sheets, a depressed credit lending environment, high unemployment rate and low earnings growth should have had an impact on equities.

There is no doubt that the Nifty has rallied by approximately 68% since January 2014. This rally has also coincided with a global stock market rally with equity markets in other EMs like Philippines and Indonesia surging by 43% and 45% respectively during the same tenor. Global investors, on the back of record low interest rates in developed markets and on the back of high liquidity, have thronged to EM assets in their quest for higher yields.

Perhaps by the same measure and possibly, buoyed by positive sentiment on election results, FII inflows in equities were $16 bio in 2014 & $8.2 bio in YTD 2017. But these numbers are still lower than those during the pre-Modi era where inflows were at $24.4 bio in 2012 and $20.1 bio in 2013.

Record inflows into equity mutual funds from retail investors looking for substantial real yields post demonetization and RBI policy rate at 6%, and in the absence of other high yielding investment avenues, has kept the Nifty well supported.

The allocation to equities by domestic retail investors was no doubt boosted by a decline in political uncertainty. But in a country where wealth creation has been defined by real estate and gold, it is a matter of time, before investors move their money again.

 

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