Tuesday, April 14, 2009

Bulls Bears and Third Front




With the election in full swing, the speculation of which party or parties will come to power after the formation of 15th Lok Sabha is rife. All the analysis on TV and newspaper are showing that neither the UPA nor the NDA is likely to garner the 271 seats required for the formation of a government.

The capital market does not favor any political formation over other and generally looks at stability and will be happy with either the UPA or the NDA coming to power with absolute majority and lasting the full term. In case the third front comes to power with outside support of the congress or BJP, the stock markets are expected to move southwards. The third front will mean a combination of about two dozen regional parties with no focus of policy or ideology and with left being a part of it will have foreign policy and economic policy which will perhaps take India back by a few centuries.

The third front will certainly frighten the investors away from India for the following reasons:
1. Left’s anti-market policy and labor friendly policy (left has successfully shut down industries in West Bengal in their 3 decade rule and only recently started getting investor friendly again).
2. SP’s anti English, anti computerization (as in their manifesto) policy will perhaps make India competitive only with the SWAT areas of Pakistan, Afghanistan and Somalia.
3. Banning of forward trading as proposed by SP and left will only make hedging impossible and bring in more losses for India Inc and needless to say taxes for the government.
4. Finally, and most importantly any third front formation supported by one of the big 2 will not be able to last for long.

Historically, it has been seen that the capital markets do not like the amalgamation of a myriad of political parties coming together and giving an unstable government (like in the times of Deve Gowda and I. K. Gujral) with outside support.

If the third front does come to power this time, it is my guess that the share markets will see a new low in the month of May and June 2009.

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