What will happen if BJP loses three key states on 11th December?

Many investors are concerned about the impact the state assembly elections will have on the stock market. There are five states where the election process is underway and the results of all these states would be declared on 11th December. The exit polls of all five states would be announced on 7th December as polling in Rajasthan as well as Telangana would be over on that day. The poll outcomes of the three states—Rajasthan, Madhya Pradesh and Chhattisgarh—would be closely watched by the markets. All these three states are presently ruled by the BJP governments, of which two states—MP and Chhattisgarh—have been ruled for three consecutive terms, and if re-elected, it would be a fourth win in a row—a record of sorts. But the BJP need to overcome the huge anti-incumbency factor to win this time around. On the other hand, Rajasthan has seen alternate terms (since 1993) for the BJP and the Congress at every assembly election. Since the BJP is in saddle now, this time the assumption is that the Congress will win the election. Going by the body language of the BJP leaders, it does give an indication that they are not too optimistic on Rajasthan. The stock market is looking at various possibilities, ranging from BJP losing all the three states to winning one or two, to winning all three.

Let’s try and assess the impact each scenario could have on the stock market.

History is a great guide. Past trends help us crystal gaze on what could be the future impact. Let us assume that the first probability of BJP losing all the three states comes to pass. The immediate reaction in the market would be a downward move, as such an outcome would create some doubt about whether the Modi government would be able to retain power in the next general elections. But will this downward trend continue beyond a day? To answer that, I have looked at two market reactions when BJP did poorly in state assembly elections.

Let us start with Delhi state assembly elections of February 2015. The election took place less than a year after the spectacular victory of the BJP in the general elections in May 2014. Most of the exit polls did give an indication that AAP will get a majority, but no one could predict that AAP would sweep the polls, winning 67 out of a total of 70 seats, with the BJP just managing to win three seats and the Congress scoring a duck. The market did not react negatively, despite the BJP’s poor show. The Sensex lost 491 points, it recouped the entire loss in a couple of days.

Now let’s check the Bihar elections, where again the BJP did not fare well. On 8th November 2015, when the results started coming in, it was a clear victory for the alliance that consisted of JD-U, RJD and the Congress, with the alliance winning 178 seats out of a total of 243 seats. But the market hardly moved post the results, suggesting that the BJP losing Bihar election evoked no negative sentiments in the market.

These two examples give a clear indication that if BJP for some reason loses all the three states, the impact on the stock market may not be significant. If at all  the market sentiments get impacted, it would be a one or two day affair. Even that impact would not be more than 500-800 points on the downside. Nowadays, 500-point movement has become normal, even without elections.

Now let us look at the possibility of the BJP winning all the three states. Will this spur the Sensex upward? For this, I have taken the example of Uttar Pradesh assembly election results, where the BJP did extremely well. The UP assembly election took place last year in March 2017. The BJP surprised with a resounding victory as it won 312 out of 403 seats. But the market did not see any sustained rally. So even if the BJP wins 3-0, don’t expect any rally in the market.

Now what happens if BJP wins 2-1 or 1-2? In this kind of scenario too, don’t expect any major movement on either side.

Investors must understand that the market has no liking for any political party, be it BJP or Congress. Market reacted negatively to the same Congress when it came in power in 2004 and gave a thumbs up in 2009 election. The same way, the market rallied in anticipation of BJP coming to power in 2014 election.

What market care about are earnings and liquidity. These two trends decide the long-term trajectory of the market. Election results may come and go, but that’s not going to change the trajectory of the market.

Hence don’t wait for the election results to invest. Investing is all about buying quality companies at the right valuation. Marketsmojo stocks (www.marketsmojo.com) does exactly that. Don’t attempt to time the market with election results.

It is a little premature to speculate the impact that these state assembly elections will have on the general elections next year,. In politics, six months is a long time. Voters’ mood can change in six months. Remember, the BJP government at the Centre preponed the general elections to May 2004 after winning the state assembly elections in MP, Rajasthan and Chhattisgarh thinking that voters are with them. The rest is history, as voters’ mood had changed by then. Also, the voters’ trend in assembly elections and general elections are normally different as assembly elections are fought on local issues, while the general elections are contested on national issues. Right now, the market is expecting Modi to get re-elected in the next general elections, but with a reduced majority. But the market is entitled to change its view by the time the general elections approach.

P.S.: My prediction is that the BJP will win MP and Chhattisgarh and there will be a nail-biting finish in Rajasthan.