With the last phase of ongoing Lok Sabha elections 2024 scheduled for Saturday and the poll outcome likely in few days, Kotak Alternate Asset Managers' Chief Investment Strategist Jitendra Gohil has warned that the stock market may fall over 20 per cent and should take time to fully recover if the NDA alliance fails to form the next government. While saying probability of such an outcome is thin, Gohil said it is prudent for investors to diversify portfolio and reduce risks ahead of the election results, as the upside could be limited but downside could be severe.
Ahead of exit polls on June 3, Gohil said his investment committee maintained a neural stance on equities i.e. to stay invested inline with asset allocation.
"In our view, there is a high probability that the NDA will form the government with the BJP getting the full majority. Elections will be over on 1st June and the market will react to exit polls on 3rd June (Monday). We note that in the past two elections, the BJP got significantly higher seats compared to poll predictions," he said.
In a note, Gohil said it is true that anti incumbency, concerns over formal job creation, the perception of hardline Hindutva ideology and allegations of misusing government agencies like ED and CBI may negatively play on the voters mind.
"However, more support from the women's voter base, excellent handling of the economy in difficult times with good control over inflation and rupee, assertive foreign policies and above all weakened opposition should outweigh the reduction in vote share, in our view," he said.
Gohil said a difference of 10-20 BJP seat wins compared to the previous seat count of 303 should not make much of a difference to the market trajectory, as investors are looking for a stable government with continuation of policies. Hence, full majority for BJP will be BAU for the market, in our view.
"What if the BJP gets less than the full majority mark and forms a coalition government with NDA partners? In this scenario the market may correct 5-10 per cent in our view. However, in the medium term it won't make much of a difference and the market may recover. However, in case NDA fails to form the government - probability is thin though- the market may fall 20 per cent-plus and will take time to fully recover," he said.
Gohil said the unexpected outcome may trigger a major sell off in PSUs, capital goods, manufacturing (especially PLI scheme related sectors), defence related stocks; but the IT and FMCG sectors may see buying interest.
While in the long run it is difficult to predict the policy shifts between governments, Kotak believes the previous 10 years of reforms will be difficult to reverse.
"It is prudent to diversify portfolios and reduce risks ahead of the election results as the upside could be limited but downside (although the probability of the NDA losing is thin) could be more than 20 per cent. In case of a weaker mandate or NDA losing, the rupee could also come under pressure, hence would like to reiterate our positive stance on gold as well," he said.
Apart from election related uncertainty the market will keenly watch further strengthening of the Indian economy.
"We continue to believe the consensus is still underestimating India's growth potential and there could be more upward revisions to growth numbers. Tax collections have surprised on the upside meaningfully and CAD is well under control. Bond yields and the INR has remained remarkably stable reducing country risk premium for India," Gohil said.
Rural is recovering with FMCG sales in rural areas now growing faster than urban. Two wheeler sales have recovered meaningfully which confirms strength returning in the rural segment. This coupled with significant improvement in corporate balance sheet and strong banking fundamentals should help India to command premium valuations, Gohil said.