Key Stock Market Takeaways from the State Election Outcomes

Key Stock Market Takeaways from the State Election Outcomes

Last Updated: Oct 25, 2019 - 03:30 am 121.2k Views

The election outcome in the states of Maharashtra and Haryana were, perhaps, much closer than what most of the exit polls had predicted. Most exit polls anticipated a virtual sweep for the NDA in both the states. The actual results have been much closer that that; although the mandate still appears to be favouring the ruling NDA in both the states. However, the close contest has thrown open a number of possibilities on electoral formation and political parties are likely to take their time before finalizing the combination. Before we move to the economic and market implications of the verdict, let us quickly look at the electoral possibilities in both the states.

What are likely outcomes in Maharashtra and Haryana?

In Maharashtra, the BJP seat count was lower than anticipated but that was more due to the fact that the BJP contested in lesser number of seats. The real surprise was the performance put up by the Congress and NCP, which appears to be getting more seats than what the exit polls had predicted. However, the BJP and Shiv Sena have been alliance partners for over 25 years and the alliance has served both parties well. While the splitting of portfolios may still be a subject of bargaining, the NDA combination looks most likely to form the government.

In Haryana, the BJP does not have any alliance partners but it is just about short by 5-6 seats for an absolute majority. That could be possible either with support from the JJP or the independent candidates. The Congress may perhaps regret when they look back at these two elections that they did not put their best foot forward when the condition was tailor-made for them, but that is a different debate altogether.

What are the implications of this outcome for the economy and markets?

There are some interesting implications for the macro economy, the reforms process and the stock markets from the election outcome.

  • In a way, the narrative has not really changed between the general elections in May and the recent state elections. The NDA has emerged as the default combination and that means the existing reforms process can continue without too many hiccups. That could be comforting for the market overall.
  • Stock markets will interpret the result as a vote for continuation of the reforms process. In the last 5 years, there have been some measures like demonetization and GST that has had its share of critics. However, other measures like the Bankruptcy Code, lower personal taxes, corporate tax cuts and infrastructure spending has gone down well with the people. Stock markets would heave a sigh of relief that the broad reforms process is here to stay.
  • Most foreign portfolio investors (FPIs) were watching the all-important Maharashtra elections quite closely. Back in December 2018, FPIs had sold in the markets after the ruling NDA lost the states of Madhya Pradesh, Rajasthan and Chhattisgarh. On the other hand, FPI flows saw a spurt around the general election outcome in 2019. FPIs have been a tad cautious in the last few days and this outcome will be a boost to FPI sentiments; especially in equities.
  • Maharashtra is a critical state because apart from being the commercial capital, it is also the biggest contributor of direct and indirect taxes to the nation. Hence continuance in state policies is a major criterion. The current mandate will ensure that the centre and the critical state of Maharashtra can be more in sync on economic policies.
  • Lastly, the stock markets have been valuing stocks at a premium by betting on the full outcome of some key reforms measures. Currently, GST implementation, corporate tax cuts, investment tax incentives are all work-in-progress. A near decisive mandate in both the states gives the finance ministry and the NDA think tank the opportunity to pursue these policies with greater aggression and a sharper sense of purpose. That may be the biggest takeaway for a stock market that is hungry for aggressive fiscal reforms.

The final outcome and the nature of power sharing may evolve in the days to come but the broad mandate is clear. It is a vote for the continuation of the reforms process, albeit with some checks and balances. It is now over to the new government; and the Sensex is surely watching.

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