Modi bounce: Animal spirits of Sensex may be overdone for now

The exit polls have given another entry point for Sensex and Nifty bulls. Around mid-morning on Thursday (5 December), the Nifty was up 115 points and the Sensex by 365 points.

The animal spirits of marketmen make for good headlines for a day, but a lot of the sentiment is make-believe, and the markets have little to crow about. Investors who start believing in the bull run may be lambs for the slaughter if politics heads the other way.

While the day’s headlines say the BJP may win 4:0 in the assembly polls, the bulls should have been foxed by the impending surprise verdict in Delhi, where the Aam Aadmi Party looks likely to wolf down the BJP’s lunch and spoil the party.

Even backward rabbits should know that the rise of AAP is not good news for the BJP, as it swallows a part of the urban vote which is the mainstay of the BJP’s Lion, Narendra Modi. From a rag-tag skunkworks, AAP is a roaring tiger now - at least in Delhi.

Hawk-eyed watchers of the political scene may note that the Congress appears to be a dead duck, and Rahul Gandhi is leading the Congress sheep nowhere, but this does not automatically mean the BJP’s fortunes will soar with the eagle. It first has to deal with the political challenge posed by a party it views as snake-in-the-grass: AAP.

[caption id=“attachment_1040443” align=“alignleft” width=“380”] The Sensex’s eager-beaver flirtation with hope about 2014 may provide a short-term joyride for market mavens, but economic realities may still make monkeys out of all of us.[/caption]

What this means is that the market’s recent bounce - let’s call it the Modi bounce - may be built on sand, and we may have to bear with many contradictory pulls and pressures as 2014 approaches. There may be more dog days ahead, as 2014 brings more twists and turns in this hare-and-tortoise electoral race. As politicians play cat and mouse with the electorate, investors have to keep their fingers crossed.

Here’s why the market will change colours like a chameleon as politics dominates economics in the coming months.

First, the markets have only one big player - the Godzilla FIIs, who have about $200 billion invested in Indian stocks. If they sell, the bears will be dancing. The reason why the markets have held up so well is because the rupee has crashed - which makes an exit difficult for them. Most FIIs are nursing 30-50 percent losses due to the rupee’s fall and if the market rose some more, some would be tempted to cut their losses. If the markets were really solid as a buffalo, the stork should be bringing in more new issues - but IPOs are few and far between.

Second, whoever wins in 2014 will have to charge like the rhino on reforms - and a key element of reforms will be revision of energy prices (oil, coal, power, gas). If this happens, the economic slowdown will first worsen before it improves. This is hardly a situation in which corporate profits will improve. The next government cannot afford to be a caged parrot to either crony capitalists or the bureaucratic system.

Third, if Modi becomes PM and the rupee rises in tandem due to soaring market confidence, it will puncture one of the few things working for us now - rising exports. In a world where economic revival is happening at a snail’s pace, a weak rupee is what is helping us beat the slowdown. This does not mean a rising rupee is bad - it will bring down imported inflation - but there are no easy answers to the problems of stagflation.

Fourth, the UPA has booby-trapped the economy by legislating food security, a stringent land bill, and mindless election-eve spending which will make the Indian economy a lumbering elephant for some time to come. Reversing all this will cost any new government a lot of political capital - and this is something most political leaders chicken out on. Only a party with a clear majority (or a near majority) will have the stomach for 1991-type reforms, but nobody is predicting that kind of win for BJP or Modi. But the market is an ostrich, burying its head in sand to these realities.

The Sensex’s eager-beaver flirtation with hope about 2014 may provide a short-term joyride for market mavens, but economic realities may still make monkeys out of all of us.

The market is betting that the ugly duckling Indian economy will become a swan in 2014, but right now the transformation is nowhere in sight.