Was the Gujarat Verdict Supposed to Mean Something for the Market?

The Gujarat election verdict is out but what does it mean for the market? Niraj Shah explains

The Gujarat election verdict is out but what does it mean for the market? Was it even supposed to mean something?

We will get to that in a bit. Let’s first look at the verdict itself.

Everyone went home happy.

The BJP, because it won. You can argue about how they got a scare, but they won.The Congress, because they put up a fight unlike any we have seen from them in recent times.

The country, because an opposition finally rose, and that is always good for a vibrant democracy.

The markets? Because they ended in the green?

The Big Question: Did the Markets Go Home Happy Today?

Accuse me of trying to view everything through the prism of equity markets, but that’s just me. My view, and the view of a clutch of people I spoke to, is that this election verdict, the way it has come about, likely sent the market home happy.

The benefits to democracy not withstanding, the equity markets may simply benefit from two key reasons. First, the political premium stays elevated because had the BJP lost Gujarat, the perception of stability might have come into question, and the perception of fiscal largesse might have found its way in.

Mind you, I am using the term ‘perception’ deliberately here. Second, the markets would now want to believe that there will be less/no more measures which could have short-term gyrations for the markets (read demonetisation and a slightly underprepared implementation of GST).

There’s irony in the second point though: everyone who thinks demonetisation was bad for the markets now knows that it’s the reason that domestic mutual funds got so much money and were able to deploy cash which helped shore up the market in the wake of selling by foreign investors, and enabled the Indian markets to stay close to all-time highs.

People may well argue that we would have reached these levels eventually, but no one can challenge my argument that the note ban accelerated this arrival at the peak, and helped Indian markets stay at the relatively expensive trailing valuations.

While the markets went home happy today, was this election verdict supposed to mean something for the market? Maybe not. Maybe all that the market wanted was the election to get over without much disruption so that it can be business as usual.

I can assure you that from tomorrow, the conversation would return to valuations and the upcoming earnings and the budget. In fact, it returned to that in a small way in our afternoon shows. But for this conversation to happen in the business-as-usual way, there was a need of a very important undertone — political stability.

This election has provided that. In fact, it has done more than that. The election has also provided a small warning to the ruling party to be vigilant about what the voter wants. As one market guest told me: 'Your state voted just the way it should have'. And now you know, I am a Gujarati.

(The article was originally published by BloomberqQuint. Niraj Shah is Markets Editor at BloombergQuint.)

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