India's Stock Market May See A 10% Pre-Election Rally, Says Morgan Stanley
The success of I.N.D.I.A alliance will be an important moment for both the poll results and equity market, says the research firm.
The Indian equity market may see a 10% pre-election rally in anticipation of a stable and majority government, according to Morgan Stanley.
The market will follow its familiar pattern of pricing the results that favours continuity in government with a majority, Morgan Stanley said in Sept. 3 note.
The market, however, could experience significant fluctuations post-election, according to Morgan Stanley. These swings could range from a potential increase of up to 5% to a substantial decline of as much as 40%, depending on results, it said.
"The wild swing has historical precedent, although we think it could be more acute this time around," it said. "For example, in 2004, when the election results were against what the market was pricing in, the Sensex fell 17% in a single trading session."
Voting in the world's biggest democracy with one billion voters will likely commence in April, with results likely in late May.
Factors That Could Shape Results
Prosperity Matters
Incumbency can be a positive if voters are feeling prosperous, the brokerage said. But the challenge is that prosperity differs across voting cohorts, it said.
Apart from the absolute level of growth and inflation, indicators like levels of poverty, farmer suicides, terms of trade for rural India, female foeticide, infant mortality, and government transfers form part of how voters assess their prosperity, it said.
There is also room to announce fresh policies before the elections, which can influence voters in a particular direction, the brokerage said.
People Who Could Influence Elections
People who can influence the election this time around are stock market investors (over 10 crore), social media users (over 50 crore), and first-time voters (about 13 crore), according to Morgan Stanley.
These are not mutually exclusive pools but are mostly higher than what they were in 2019. This is especially true for stock market investors, which now number an estimated 10 crore to 12 crore, about four times larger than they were five years ago.
These three cohorts, because of their growing size, will add complexity to the electoral process, which will continue to be dominated by caste and religious groups and farmers, who remain the largest voting bloc, Morgan Stanley said.
Pre-Poll Alliances
The Indian National Congress and the Bharatiya Janata Party have together won at least 50% of seats in the past 10 elections, and regional parties continue to have a large vote share, underpinning the importance of alliances and seat sharing to the ultimate outcome, Morgan Stanley said.
"In that context, the 26-party alliance called the I.N.D.I.A. is a significant development," the note said. "The key to this alliance's success, in our view, will be its ability to share seats amicably ahead of the elections."
"To us, this will be an important moment for both the election results and the equity market outlook. However, clarity on this will only emerge closer to the election date," it said.
The Election And Market Outcomes
If I.N.D.I.A. is able to muster a viable pre-poll alliance (implying seat sharing that results in bilateral contests with the BJP-led NDA), the market could become less bullish and the upside forecast would not materialise, according to Morgan Stanley.
That would be "the worst possible outcome for the equity market, according to our assessment of likely scenarios", it said.
Other factors, such as global growth, global interest rates, and crude oil prices, could also alter this absolute price forecast.
"We expect domestic growth to remain strong, but a global slowdown is a risk. While Indian equity market correlation to U.S. stocks has declined, any sharp decline (or rise) in U.S. stock prices would influence the market in India", it said.
What To Do With Portfolios
To handle the volatility around the election result, investors must take a view on the likely outcome and the ensuing market reaction and tailor the portfolio to match the view, Morgan Stanley said. "Our recommended sector allocation is a barbell portfolio that is overweight domestic cyclicals, rate-sensitives, and technology."
