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How political upheavals affect your savings

Why your investments will see ups and downs despite the light at the end of the tunnel

Between the assembly elections that just got over and the Lok Sabha elections that are on the horizon, it’s clear that politics is going to dominate most discussions of the economy’s prospects and those about the investment markets. As I’m writing this on the Sunday of the elections results, it looks pretty likely that Monday will dawn as a day of euphoria, with the markets convinced that May 2014 will bring about the results they expect. Of course, markets being the manic-depressive creatures that they are, there will be probably be regular mood swings going forward.

However, markets are also prone to have a simple view of the future, and one which is easy to model in terms of what it means for investments. Obviously, this tends to often be at divergence with the real future when it arrives. In the assembly elections, for example, the obvious example is the rise of the AAP. However markets are inherently optimistic creatures and tend to pick on the best possible interpretation of whatever they think will happen.

Markets run on expectations, and it’s easy to build an expectation that the anticipated outcome will solve all problems. But the hole that we have dug for ourselves is much deeper than that. Whether it’s in the macros, or in corporate indebtedness, or deeper issues like infrastructure or even deeper ones like the ghastly state of education, it’s a long long way to go. On top of that, given the disaster that the UPA has had in these assembly elections, the next few months are ever likelier to turn into an orgy of self-destructive economic mismanagement, when anything can be sacrificed for a few seats more. It’s pleasant to be optimistic, but things are very much in balance.