‘Sensex can potentially swing 5% to minus 40% after poll result’

The Sensex closed at 65387.16 on 1 September and a 10% base case implies 71926 through May, assuming the election dates are not advanced. Advancing election date could concentrate the market move into a shorter period.

The report titled “One Billion Voters : Will they please the market?,” notes, “If we are right about pre-election market move, then depending on what the election result is, we believe the market has the potential to swing between +5% and -40% – a wide range underpinning how important the elections could be to market in short run. The wild swing has historical precede-nce though we think it could be more acute this time around.”

A 40% fall means Sensex could tumble to 43155 level from the high. For example, in 2004 when election res-ults were against what market was pricing in (the then NDA government lost) the Sensex fell 17% in a single trading session.

It further says that “incumbency can be a positive if voters are feeling prosperous. The challenge is that prosperity differs across voting cohorts. Apart from 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 prosp-erity. There is room to annou-nce fresh policies before elections, which can influence voters in a particular direction.”

Morgan Stanley expects that the Sensex could gain 5% post the polls ( a three-month outcome) if the incumbent BJP wins around 260 seats—543 seats in the Lok Sabha or lower house of Parliament. This is what is likely to be priced in based on current available information. What the market prices in could change if opposition demonstrates a strong coalition by early next year.”

If BJP wins 240 seats but still forms a government with its coalition partners, the benchmark index could correct by 5-7% and if the incumbent (BJP) loses or gets around 225 seats, the market could tank by 20-25% before settling higher ultimately if anchor party has a good position in the House.

If the incumbent loses but the lead party gets less than 200 seats with a weak coalition at the Centre, with the lead party playing only a supporting role), the market could tank by 30-40%. This implies a drop from the high of 71926 to 43155 for the Sensex and is the worst case scenario .

“This is likely the market’s worst-case scenario; we assume a third is shaved from the index. In a weak coalition the predictability of growth and inflation tends to fall notably, even though the absolute level of growth may not be at risk. The pace of execution could also be at risk,” Morgan Stanley notes.

The report suggests that investors should tailor their portfolios in a way suitable to their view of either four scenarios playing out. For example if she believes the BJP will win decisively, she should be overweight consumer discretionery, financials, industrials and infotech. In the worst case scenario, she should be overweight consumer staples, energy, healthcare, infotech and materials, among others.

Adding that coalition governments do not necessarily lead to poor growth, the report notesd that “In the past eight elections, spread across 32 years, India has had only two majority governments – the last two (2014 and 2019). The least successful coalition governments were formed in 1996 (United Front) and 1998 (led by the BJP), lasting for only two years and one year, respectively. Real GDP growth has averaged 6.2% p.a. from F1993 to F2023. The market (MSCI India) has risen over 7.3x in USD termsfrom Jan-93 to Jul-23 vs. the MSCI ACWI index at 4.7x and MSCI EM at 2.3x. The BSE Sensex has risen 25x during this period.”

Updated: 04 Sep 2023, 10:16 PM IST