MUMBAI: The stock market is riding a global rally and is hoping a major party wins a strong hand at coming elections, but could be beaten back if a fractious group of parties including Communists gains influence at the polls.

Investors are pricing victory for a coalition led by either the ruling Congress or Bharatiya Janata Party (BJP) when the world’s largest democracy goes to polls between April 16 and May 13 against a backdrop of slowing growth.

But cracks in the two main national coalitions have raised fears that a “Third Front” could tip the balance of power, which market watchers believe could pull down stocks by between 15 to 30 per cent from current levels.

“Developments in politics seem to be increasing the probability of very fragmented parliament, which could spoil chances for a post-election recovery in markets as well,” Morgan Stanley analyst Ridham Desai said in a recent note.

The benchmark 30-share BSE index fell more than 52 per cent in 2008, a record fall, and lost ground at the start of 2009. The index looks to have found a footing since early March, rising 9 per cent in the month on hopes the worst may have passed for the world economy.

That was enough to see the market finish the March quarter up 0.6 per cent, its first quarterly rise since the end of 2007.

It rose another 2 per cent on Wednesday to close at 9,901.99. BRITTLE

The market thinks a government headed by either the Congress or BJP would be better equipped to tackle slowing economic growth and a widening budget deficit, and therefore lead shares on a more steady road to recovery after the elections.

But a Third Front coalition of smaller regional groups supported by the country’s most influential hard-left party, the Communist Party of India (Marxist), worries investors, and not only because they fear a slowing of economic liberalisation.

“Investors are worried not because the Third Front will block

reforms, they are worried because the Third Front won’t last three months,” Gul Teckchandani, an independent investment strategist, said.

A brittle coalition could knock the market down if investors, particularly foreigners, head for the exit.

“I see the market falling at least 25 to 30 per cent from current levels if there is political instability,” said Jigar Shah, senior vice president at Kim Eng Securities.
The CPI(M), a major force behind the Third Front, has called for state control of the financial sector and restrictions on foreign investment to overcome the economic slowdown.

It pulled its support for the ruling Congress-led coalition last year over a civilian nuclear deal with the United States, after four years during which it blocked moves such as privatisations and relaxations of investment limits.

The Congress found another coalition partner, and survived.

In the five years to the end of 2007, including 2-½ years when the CPI(M) was supporting the Congress-led government, the stock market rose six times in value.

COALITION

One plausible outcome would be the Congress winning enough seats to set up a government with support from a large regional group such as the Bahujan Samaj Party (BSP).

“Even a weak Congress-led coalition may dampen business sentiment and hold back portfolio inflows. India’s double-digit fiscal deficit remains a challenge,” said N. Krishnan, an analyst at CLSA Asia-Pacific Markets.

“We believe that a sustainable pick-up in investor sentiment will require signals on enhanced fiscal responsibility from the new government.”

The leader of the CPI(M) has said his party would be open to talking to the Congress about forming a government after the upcoming elections, provided it is led by a Third Front.

Even if one of the major parties win, pro-market reforms in the insurance and banking sectors are not expected to be passed swiftly.

But with the stock market beaten down so much, analysts said even a sense of strong and stable governance would help.

“If there is a favourable outcome, I am optimistic. We could see the Sensex at 11,000 to 12,000 levels by the end of the year,” said Miten Mehta, fund manager at Bellwether Capital.

source: ECONOMICITMES

Tags: election, market, polls, stock market

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