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The stock markets love it when the National Democratic Alliance (NDA) led by the Bharatiya Janata Party is at the helm. A few months ahead of the general elections, analysts are beginning to question whether this is blind love. After all, the jump in stock market valuations has not been supported at all by commensurate growth in earnings. Besides, those expecting a series of path-breaking reforms are feeling let down.

“If one woke up after a five-year hibernation and read about farm handouts, reservations, fuel price controls, temples and fiscal slippages, one would wonder what the brouhaha about the NDA’s development credentials was in the first place," analysts at Jefferies India Pvt. wrote in a recent strategy note to clients.

Also note that while the average price-earnings multiple for the Nifty index has been as high as 21 since mid-2014, earnings growth has averaged just 5.3%, analysts at UBS Securities India Pvt. Ltd pointed out recently. In stark contrast, average valuations were lower at 17.6 times earnings in the previous government’s term under the United Progressive Alliance headed by the Congress, even though earnings growth was far higher at 21.7%.

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Valuations have risen in the current government’s term despite pressure on earnings because of the narrative around improving macro stability and the reform agenda, which helped improve investors’ confidence about India’s long-term growth potential, UBS’s analysts said in a note. “The (reforms) narrative has seen some setback recently in the minds of investors," they said, citing some of the reasons mentioned above.

Starry-eyed supporters are also faced with the uncomfortable truth that without the support of earnings growth, returns have been poor. Average annual returns for the Sensex are at 9.1% in the nearly five-year period since the current government began its term. For the broader BSE 500 index, returns are slightly better at 10.7%. But these are clearly inferior when compared to the annual Sensex returns of 14% and 18%, respectively in the terms of the preceding two governments. “In the last four decades the equity markets appeared to do better when the Congress is at the helm," Jefferies said in its note.

Of course, a lot of this has had to do with being in the right place at the right time. “The market rally since 2003 and later since 2009 was largely to do with global factors that drove liquidity into emerging markets; the rural employment scheme launched by the Congress helped the consumption story, but can’t be termed a big driver of the markets by any stretch of the imagination," points out a chief investment officer at a mutual fund.

In contrast, global macro conditions have been hardly as supportive for the current government, and it is ending its term amid worries about a global slowdown.

On the reforms front, the current government has done well to roll out the goods and services tax and bankruptcy code, although the full fruit of these moves is yet to be seen. At the same time, the above-mentioned fund manager says there have also been some self-imposed constraints such as demonetisation which hurt economic activity.

“Demonetization came as a big blow to the informal economy. Though the intention here was to make the country less cash intensive, it has not worked. On the contrary it has hurt demand, especially rural demand, and hence earnings momentum," points out the head of research at a domestic brokerage.

All told, analysts say there is nothing material to distinguish between various governments in the past few decades.

“It is matter of experience that governments at the centre, be it UPA or NDA have followed more or less similar economic policies and both have actively pursued the economic reform agenda initiated in the early 1990s. It is also important to note that the Indian economy has done well and the rate of economic growth has been quite high even when the central government was not in a majority and had to depend on other partners for support," says Joseph Thomas, head of research at Emkay Wealth Management.

“The underlying macro, which is far more important for equity markets, has chugged along just fine across political dispensations with little to suggest that growth or any of the demand factors, consumption, government spend or capex, behave differently under different governments," Jefferies’ analysts say.

So as investors start to get jittery about the possibility of the BJP not winning a majority of the seats in the parliament in 2019, it’s time investors noted that there’s more to markets than political formations. 

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