The buzzing India stock market: Does it foretell a political change?

By Sundaramurthy Vadivelu

Note: This article highlights the past events in Indian political scenario and stock markets. It has to be viewed from a statistical and technical perspective and not from a political angle. The author has no association, membership or connection with any political party.

The Lok Sabha

Bombay Stock Exchange

India, the world’s largest democracy, has witnessed four general elections for the Lok Sabha since 1996 (Hindi = People’s Assembly, The Lower House of the Parliament of India). Currently, 543 Members of the Parliament are elected by the people and 2 are nominated.

Indian stock markets have been buzzing of late. After the US Sub-prime mortgage crisis (which is now forgotten by Indian stock market pundits, business television channels, financial newspapers etc.) there has been a near non stop rally in both Sensex and Nifty. On August 21, 2007 Sensex closed at 13989. Today’s close was 18658 i.e. the Sensex has gained more than 4600 points in 35 trading sessions. Every investor is looking for a correction but it does not seem to happen.

The India Street attempts to analyze the previous general elections of India and how the stock markets performed prior to the elections.

1996:

• The Congress party was defeated in the 1996 general elections and Prime Minister P. V. Narasimha Rao resigned.

• H.D. Deve Gowda resigned as the Chief Minister of Karnataka on May 30, 1996 to be sworn in as the 11th Prime Minister of India.

Let us analyze the daily chart of Nifty between January 1, 1996 and June 30, 1996.

http://groups.google.com/group/theindiastreet/web/NIFTY_D_1996.jpg

Between January 29, 1996 and February 14, 1996 the Nifty witnessed continuous rise. Similar pattern is observed between March 26, 1996 and April 19, 1996. During these periods, Nifty gained 29% and 19% respectively. During the first run-up, one can see three trading sessions gaining more than 5%.

When the political change occurred i.e. United Front formed the government after Bharatiya Janata Party failed to prove majority, the stock markets did not react to this issue much.

1998:

The President of India dissolved the Lok Sabha in December 1997 and once again general elections were held in 4 phases during February and March 1998. Atal Bihari Vajpayee (BJP) became the 16 th prime minister of India on March 20, 1998.

However, the Nifty had a rally between May 29, 1997 and August 6, 1997 as can be seen from the chart below. It gained 25.9% during this period.

http://groups.google.com/group/theindiastreet/web/NIFTY_D_1997.jpg

The eleventh Lok Sabha was dissolved on December 4, 1997 but the market had a smart rally 4 months before.

Even before Atal Bihari Vajpayee could assume office as Prime Minister, Nifty had a similar rally, as can be seen from the chart below.

http://groups.google.com/group/theindiastreet/web/NIFTY_D_1998.jpg

During this “pre-election rally” Nifty had gained about 14.78%. Interestingly, it continued even after the new government was sworn in.

1999:

The BJP Government lost no-confidence motion by just 1 vote in 1999 and general elections were held during September – October in the same year, few months after the Kargil war against Pakistan. Vajpayee continued to be the caretaker Prime Minister till the elections were over.

http://groups.google.com/group/theindiastreet/web/NIFTY_D_1999.jpg

• On April 26, 1999 Indian Parliament was dissolved.

• The Kargil war took place between May and July 1999.

Even as the Indian soldiers were fighting the intruders along the Line of Control in the Kargil district of Kashmir, the Nifty was climbing between May and July 1999 as can be seen from the above chart. It gained 45% during this period.

It is to be remembered here that the country was facing a political crisis. The Lok Sabha was dissolved and only the caretaker Government was functioning. Tensions developed between India and Pakistan over Kargil conflict. In spite of all these factors, Nifty gained 45%. Ultimately, BJP lead NDA coalition turned out to be winners and formed the next Government.

2004:

The NDA coalition recommended the early dissolution of Lok Sabha and on the advice from Atal Bihari Vajpayee, Dr A P J Abdul Kalam, then President of India, dissolved the Lok Sabha on February 6, 2004.

In December 2003, Indian stock markets were on a roll. Between November 20, 2003 (Close: 1522) and January 9, 2004 (1972) the Nifty gained 29.6%. Only two sessions witnessed a fall of more than 1% during this period.

After this dream run, a corrective decline started. The BJP lost the elections in May 2004 and the Indian stock markets witnessed heavy across the board selling between May 7, 2004 and May 17, 2004. The Nifty had lost 25% in just 7 trading sessions.

http://groups.google.com/group/theindiastreet/web/NIFTY_D_2004.jpg

From 1389 on May 17, 2004, the Nifty has come up a long way, closing at 5441. The Sensex too, has crossed 18000 today. Most of the Index stocks have gained reasonably. Some have performed exceptionally well.

Conclusion:

Though there is no direct relationship between political scenario and the Indian stock markets, the available evidence suggests that the markets do run up expecting some political news (may be good or bad). The recent non stop buzz in the Indian stock market gives us a clue that the markets are headed for a medium term or even long term reversal. Having said that, investors should stay away from taking fresh positions if they feel that market movements are euphoria based rather than on technical or fundamental reasons. They can always find investment and trading opportunities once the market returns to normalcy.

Sundaramurthy Vadivelu

Suggested Reading

Monthly Review of India stock market – September 2007 Sensex hits 16,000: The India Street Special Report Weekly Review - India Stock Market

Good news for investors as they remain unaffected with service tax on mutual funds

By Vipin Agnihotri

Contrary to the general belief, service tax will not be levied on entry and exit load charged by a mutual fund. Indian government through a circular clarified this. What’s more, highly placed sources in the government inform The India Street, that the service tax on construction industry has been lowered from previous 4 percent to 2 percent.

The pivotal factor here is that in the budget, UPA government included asset management and all other fund managements under the sub head of banking and other financial services to levy service tax at 12 percent. “Making use of the act, the tax department charged the service tax on entry and exit load also, which an investor pays at the time of buying and selling of mutual fund units,” pointed out Shalabh Saxena, Business reporter of The Pioneer adding that this made the industry to raise the issue before the government.

In my opinion, government rightly found that entry and exit load charges have no attachment to fund management service offered by the asset management company but meet the starting issue expense and other expenses of a mutual fund. Fact remains that as these expenses are not in the ambit of service tax at the moment, the department has no power to levy service tax on buying and sale of units.

Point to be noted here is that entry and exit load charges at this moment of time vary between 2 percent and 4 percent. Taking this into account, one can safely say that this ruling will lead to a savings of 0.25 percent to 0.50 percent for investors. Though, the service tax on the fees charged by asset management company will continue. It is worth mentioning in this regard that in a mutual fund, an asset management company implements the fund management routine.

Moreover, the fees charged by the asset management company is chargeable to service tax under ‘fund management service’ category. On the other hand, service offered by the distributors, selling agents, brokers, custodians and trustee to the fund is also taxable in nature under respective services such as auxiliary service, stock broking and other sort of financial services.

If one analyzes the new notification of government, one thing is for sure; provider of contract service will be charged service tax of 2 percent of the total value of the contract, which was 4 percent. Furthermore, in the case of service tax on work contract, the government has offered an abetment of 67 percent of the total value of the contract against the cost of materials such as steel, cement, wood and other fixtures used in implementing the works contract. While calculating the service tax, government has also excluded the property tax paid on an immovable property from its commercial rental income.