2019 Elections Won’t Affect Markets, Says Credit Suisse’s Neelkanth Mishra
Elections do not really have an impact on the markets, according to Credit Suisse’s India Equity Strategist Neelkanth Mishra.
“We shouldn’t overemphasise the impact of election on the market,” he told BloombergQuint. “Even the elections in May will not have an impact on a short-term investment of six to 12 months. The only impact would be on a long-term basis when we consider the policy changes.”
From a purely investor point of view, Mishra said, the private bank stock that has been rising 20 percent will continue its growth trend, irrespective of the government in power.
That’s in contrast with other market veterans who said the state assembly election results could be taken as a reflection of what will happen in May 2019.
The Indian equities pared losses yesterday and closed 0.5 percent higher, shrugging off fears after Urjit Patel’s resignation as Reserve Bank of India governor and the ruling Bharatiya Janata Party’s loss in three key states.
The BJP lost power in Rajasthan, Chhattisgarh and Madhya Pradesh in a setback to Prime Minister Narendra Modi ahead of the 2019 general election. The Congress swept Chhattisgarh and ended one seat short of the halfway mark in Rajasthan and Madhya Pradesh each, according to results announced by the Election Commission.
Watch the interview here:
Here are the edited excerpts of the conversation:
What are your initial thoughts on new governor? We might have a governor who is more at ease in negotiating as he has been part of this establishment too. Is it actually as blessing in disguise?
Traditionally, RBI governor comes from government. Some of the best governors we had like Reddy who was being bureaucrat themselves. So, it is important to understand how the other party is thinking. There is natural institutional conflict between the North Block and the RBI which didn’t go away. Bureaucrats are adopted acknowledging the turf being defined inappropriately, the inter-ministerial conflicts. These are things which bureaucrats are used to handling. It is unfair to assume that just because it came from government is somehow a government man. The moment you switch positions, there is an institution which you are part of and you start acting appropriately. He is very seasoned and very mature person. I don’t think that should be a concern for us.
With Urjit Patel doing what he has done, does it mean that the new person who comes at the helm of the institution will also be very guarded when he takes decisions on the three-four contentious issues between the RBI and government? Will the government be itself guarded before making moves, if it wants to, on the two-three contentious issue mainly, the reserves issue? What do you think is the way ahead?
It is important to have a conversation. Not having the conversation is where the problem was. Both sides have fair points on most issues and it is important to discuss and find a middle ground. That process was stalled and can start now.
Like the issue of dividend, there is committee sitting now. The committee will decide what is the right level of reserves and the RBI can take a decision on what to do. All those things were discussed and negotiated.
The issue of role of the RBI board. Just like when the MPC was set up, it was perceived by some that RBI governor’s autonomy or discretion is being diluted. As the system has settled around the MPC, I hope that MPC as an institution matures. There is certain level of continuity which committee brings in. Having the debate, that we are $2.5-trillion economy and we have to get to $5-trillion economy. Do we need slightly different institution which was here? There is no harm in having that debate that getting into the issue of independent. You could reduce individual dependency without getting government involved. There are ways going about it. The important thing is to have a debate and discussion. It will be stressful for both side but what’s come at the end of it will be good solution.
Will this election have an impact on fiscal profligacy, lot of factors which come into play in May 2019 elections and thereby on markets?
A politician looking at these results, not just in these three states but Telangana too and interpret this verdict correctively. Low food inflation which is great for the macro economy is terrible for farmers and there are too many workforces in farming. It creates stress on very large percentage of voter base and so how you will address it and hence finding some creative solution for it.
One of the reasons for which TRS won almost 80 percent of seats is much better where there votes share went from 34 percent to 47 percent, and despite the alliance of TDP-Congress where their votes share shrank. This shows that scheme and pro-farmer doles that government gave out have an impact. It will be interesting to do analysis on seat-wise voting patterns and rural versus urban. That will be the headline takeaway. If that is the case, then will that tempt the government in implementing such schemes.
From fiscal point, state government deficits are not an issue. Because of Article 293 of Constitution, the central government controls every rupee which the states borrow. If they end up giving doles or lot of farm loan waivers, it will be at the cost of something else. It is resource allocation issue and not a fiscal deficit issue. Because the fiscal deficit is capped at 3 percent for all states. This becomes a fiscal risk only if this behavior is accompanied by loose coalition in 2019 where each of these regional parties is stakeholder at centre. In UPA-I, West Bengal was incurring massive deficit. They were allowed to as they were supporting government at center. That lead to dearth of GDP, lot of interest payments. Fiscal deficit is pulling forward growth, so you have to pay for it sometime later.
If these is followed by interpreting giving doles as a way forward and we have to find new and creative ways of giving doles and this is followed by each of these parties coming to form a government, then there can be some fiscal risk. But at this time to assume that next six months will be, I don’t think it will be. It is too late for any government to act now. The government actually don’t act. We are talking about large organisation which is not easy to move them.
How will the foreign capital will react to these developments?
1998, 2003, 2008 and 2013, these so-called semifinal elections. Other than in 2013-14, where the party that won these three states won the 2014 elections too which was the BJP. In each of the previous three instances, it was very mixed. Looking at those results, if you have predicted what will happen in next general election, you will be wrong. There is a complex game theory which sets in. Like, how does this effect alliances going forward? Now that the Congress has tasted victory after long time in states, will they be less willing to stitch to alliances? Many of alliances forms because of desperation. No wants to give up stake. You give a stake because you see a mortal risk. If mortal risk is reduced, then will you form that big alliance? How much will you be willing to give up in that alliance? How the negotiation in UP happened? There are many complex theories which can be brought up. I will not extrapolate these results. But they do show power of anti-incumbency.
What will you tell your investors with regards to political scenario in India and impact on markets?
The central government’s role in the economy is overemphasised. The state fiscal expenditure is 90 percent more than the centre’s. State governments employ four times more people than the centre. If you remove railways and non-arm forces military like CRPF, border security force, etc., then central government has 400,000 people. And it is 1.2 crore people in state governments. Mostly the central government, through process of steady reform and sometime accelerated reform in phases, has brought down its presence in the economy. Now, you don’t track central governments action on telecom to track the telecom capex, but you track private companies. Same across other sectors. But you can’t say this about a state government. They still have monopolies in state transport corporations, power distribution, healthcare, education. It is not important directly in terms of economic momentum.
If you plot Nifty six months before and after elections, it is very hard to find if I didn’t tell you where the election was. There is no inflection. If the trajectory was upwards, it is upwards and if it is sideways then it is sideways and if it is down, it keeps going down.
In central government elections, it is wrong to say that the government does not matter. If you are holding an IT services, pharma, metal, refinery, global auto maker stock, it has no impact. For the consumption names, yes for staples. For private banks, the one trend which has made money for the last 20 years is private banks over PSU banks. Private banks can now pick and choose customers, expand their margins. So, from a pure market perspective, it should not create too much volatility. For a long-term policy-making perspective, it does matter as how the government functions. But not for 6-12 months of price-to-earnings.
Given all the global volatility and the fact that India gets a reasonable part of its flows as part of emerging markets and Asia...we will look at pluming of flows or individuals, like if someone is holding private bank stock, then it doesn’t matter as it is compounding at 20 percent.
We shouldn’t overemphasise the impact on elections on markets. There is an impact on the country, policy-making but from investors’ perspective, it should not matter that much. This is my message.
Even for May 2019?
This has been my message for the last 8-10 years. That doesn’t change.
What does happen is the fear of volatility. If you are talking about crowds then it is very hard to predict their behaviour. When a stampede starts, it is hard to say. You can say that there is nothing to be worry about and then the stampede starts. It starts and ends. Then the long-term trend catches up.
That is hard to predict. Can there be funds who panic and say that we are going into a phase of policy uncertainty and unstable government at the centre? That is bad optics. It will create some panic and some people will refrain from putting money in. From what we gather from our investors, that their investors are sometimes cautious saying that let the election happen and we will give money to invest. In terms of earnings, there is no change.
One additional factor which is important now is domestic flows. Good years of FII flows used to be $20 billion. We are getting $20 billion of domestic flows every year. It doesn’t seem like it will stop. Muscle memory of what will FII say is becoming less important. I don’t think it doesn’t matter, if they panic then there is a problem but at the margin, they matter less. Will the domestic investor panic? A large part of it seems to be Systematic plans. There will be lot of commentary, noise and we have to navigate through it.
Do you believe that the global market movement and global macro would play much larger role in 2019 on Indian markets than the domestic factors?
I think so. China has withdrawn some tariffs on autos. If there is an approach for trade war, it will reduce some of the uncertainty. But the fact that the U.S. was on super charge growth and currently on it that it may go in recession. Whenever that momentum eases, new types of problems start emerging. What those problems and fault lines will be if the U.S. demand engine which is fiscal stimulus pulling forward growth. Now, you have to give up growth. If give up growth is that lot of economies starts slowing down, what kind of debt will start emerging. It will be a period of volatility because global growth is not safe as it seems.