Political Uncertainty Ahead

The focus is slowly shifting from the economic slowdown to political stability.

Next 2 months, there will be no economic pronouncements. Whatever has to be done will be done by the next government.

The next government can be a weak government.

The reasons are:

1. The NDA has been weakened. BJP-BJD split means that last time they won 18 out of 21 seats in Orissa, this time that tally will come down and BJD may not support BJP after the elections. Of course, if they dont get majority on their own in the assembly elections, they can be friends again.
Arun Jaitley and Rajnath Singh have fallen out. This internal factionalism is going to cost them dear especially in Bihar. The chances of LK Advani becoming Prime Minister are becoming dimmer.

2.. The UPA has got a boost with Trinamool alliance in WB and infighting within the left in Kerala. Congress will gain at the expense of the left in both these states. The major problem has been the lack of seat sharing with Samajwadi Party. Together, they could have won at least half (40 seats) in UP. Maywati now stands a fair chance of winning 30-40 seats. This lack of alliance will hurt the Congress in far off seats also. For example in Mumbai South where Milind Deora should have been in a straight fight with Shiv Sena, a SP nominee will eat away his votes.
The delimitation of constituencies is going to be major factor.

3. The Third front has the problem that everyone wants to be a PM. They have some good allies like TDP which should do well in Andhra, Jaya in TN, Left (around 30 seats), Mayawati, potentially BJD. But they will again end up with 120-140 seats at the max.

Without BJP or Congress support, Third Front will not be able to form a government. The government formed would be unstable and unlikely to last. Either NDA or UPA has to cross 180-190 seats in able to rope in Third front allies. In the current scenario any of the 3 formations look unlikely to cross 180 seats.

The keys to 7, racecourse road, may well be held by Mayawati and Jaya. You know the havoc they created in 1998-1999.

FIIs should most likely stay away from the Indian markets.

Another unnoticed event that has happened is that the bond yields have shot up almost to 7.3 % before falling down again. This means the rate cuts have not worked at all. If government is going to borrow at 7+ then the corporates will borrow at 9 pc plus. This is because heavy borrowing by the government to finance the stimulus packages.

To sum it, I would stay away from the markets. too much uncertainty about. Every rally should be sold into. The mid-caps are being butchered. Take Mahindra Lifespace for example, almost debt free, strong management, sustainable business model now at Rs 80.

Now, you can have 2 more reasons for markets to move up or down. To move up, year nav dressing, if they move down, people booking short term capital loss.

Cheers,