While the report does not rule out the possibility of elections getting advanced, the report highlighted how the investor debate has now shifted to whether India will vote for “continuity and a majority”. The world’s biggest democratic election with one billion voters will likely commence in April 2024 with counting and the release of results to occur on a single day in May.
The report lists four possible outcomes while assigning a performance range for Sensex between 5% and -40% based on the outcome.
Outcome 1: Sensex will likely gain up to 5% if the incumbent government comes with over 260 seats or an absolute majority. “This is what is likely to be priced in based on current available information,” the report said. However, there is a caveat which says that the situation could change if the opposition demonstrates a strong coalition by early next year.
Outcome 2: Lead party with less than 240 seats where the incumbent forms a government with coalition partners despite a shortfall. This is less than ideal for the stock market and could result in 5-7% drawdown for the benchmark indices. “The market could be concerned about the compromises that need to be made on economic policy to make a coalition government work”.
Outcome 3: Lead party with circa 225+ seats with a turnover in government but the incoming anchor party has a good position in the house. Morgan Stanley has an immediate sharp correction expectation of up to 20-25% fearing policy stability and foreign sentiment and flows.
Outcome 4: Incumbent loses and the lead party comes with less than 200 seats which results in a weak coalition with participation of a lead party only in a supporting role. Calling it a worst-case scenario, the report assumes a third is shaved from the index. A weak coalition will lead to lower predictability of growth. “Even though the absolute level of growth may not be at risk, the pace of execution could also be at risk,” the report said.The above assessment is based on historical precedence but could be more acute this time around, the report mentioned while highlighting how in 2004, when the election results were against what the market priced in, the Sensex fell 17% in a single trading session.
Sectoral Recommendations
The US-based brokerage remains ‘Overweight’ on consumer discretionary, financials, industrials, and Infotech while remaining underweight on consumer staples, energy, healthcare, materials, communication services and utilities if Outcome 1 happens.
In the worst case scenario (Outcome 4) where the incumbent loses, Morgan Stanley is ‘Overweight’ on energy, consumer staples, healthcare, utilities, communication services, materials and info tech.
Elections on Plate
There are five state elections taking place in the coming months viz. Mizoram, Telangana, Rajasthan, Madhya Pradesh, and Chattisgarh.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)