Investing in Stocks, the Election-09 factor

The stock market is pricing in some amount of uncertainty ahead of election results. Volatility of stock market was high during last few sessions based on  market grapevine flowing in the investor/broker circles based on NDA/UPA gaining in various phases of General Election-09.

However, it is immaterial as who forms the Government from Stock market’s point of view, but the alliance partners involved to form the next Government is very critical for stock market.

Election 09 – Stock markets on tenterhooks

Many investors are holding on to cash and waiting on sidelines to enter stock market or have gone short. We may see a completely different picture once clearer indicators start emerging from the political arena. Market Analysts and Investors are eagerly looking forward to the release of exit polls data starting Wednesday evening, furthermore to the counting of votes scheduled to start from Saturday.

Following are some of the possible scenarios that impact the future direction of Stock markets and your returns from stocks investment.

Scenario 1 : UPA Forming the Government without Left Parties Support

Stock markets will take this development favorably. It will also mean a continuity of Policies put forth by the outgoing Government. The only factor that may impact stock market would be the lead in margin of seats that this coalition enjoys to form the Government. Stock markets will appreciate wider gap in the number of seats as it will strengthen the stability factor of the Government.

Scenario 2 : UPA Forming the Government with Left Parties Support

Although this scenario may provide better stability to the newly formed Government, stock markets will treat it extremely negative, at least in the short term, as it will apply brakes on most of the Policy and Liberalization expectations that corporates, businesses and investors have. As seen in post Election 2004 results, stock markets may take a little longer to recover lost grounds and start rising again.

Scenario 3 : NDA Forming the Government

This again would be a welcome scenario for the stock markets as the economic policy of NDA are also considered favorable for the stock market. Investors may expect to see many initiatives which were foiled by Left Parties during the current UPA regime being cleared by NDA. Again, the margin of seats with which NDA forms the Government would be critical for the stock markets.

Secnario 4 : UPA/NDA Forming Government by changing their Prime Ministerial Candidate

This again would be an uncertain scenario, and the stock markets will remain volatile for some time before the actual picture emerges. The prime ministerial candidates Mr. Manmohan Singh and Mr. L. K. Advani from Congress and BJP respectively were central figures during the run-up to Election-09. It is very difficult to predict the expected reaction from the stock market based on this hypothetical scenario, now. The dynamics of political situation post counting of votes that leads to change in the leadership would be critical to watch and analyze.

Secnario 5 : Third Front forming the Government, with or without support from Congress/BJP.

A scenario which does not seem very unlikely this time around, could be treated extremely negative by the stock markets. This would mean a considerable shift in the ongoing economic policies. Further the possibility of the coalition breaking up midterm would be extremely high as there is no cohesive force binding them together other than keeping BJP out of power. First signs of cracking Third Front has already started emerging when JD(S) leader, HD Kumaraswamy met Congress President, Sonia Gandhi even before start of counting of votes. Although, the development was brushed aside as inconsequential by Kumaraswamy but the indication is clear to all and sundry.

Secnario 6 : No one able to form a government, Country forced into fresh elections

An outright negative scenario for the entire country, not just the stock market. It means a drain of funds from the exchequer which is not at all good for the economy, especially in the current scenario of Global Recession.

Conclusion

Your stocks investment is going to see a big change (in either direction). For long term investors it may throw up very interesting opportunities to pick value stocks, while the short term speculators may take short term benefit arising out of volatile stock markets by taking adequate positions.

Whichever scenario emerges, one thing is clear it’s a bull run for the leaders of mid-cap political parties as their political indices may touch an all time high figure.