In a scenario where the Prime Minister Narendra-Modi led BJP retains absolute majority i.e. over 272 seats, whose probability UBS says is high, the stock market indices Sensex and Nifty are likely to scale new highs. Among four scenarios that the foreign brokerage sees, the INDIA alliance coming to power is seen as big negative for equities. In such a scenario, stock market valuations may get derated and a test of pre-NDA valuation multiples are likely, UBS warned.
UBS said alliances have historically played crucial role in Indian elections. But the BJP’s dominance as a single party in the previous two elections has somewhat diminished the influence of coalitions in government formation.
"In the 2019 general elections, the BJP achieved a voter share above 50 per cent in 222 out of the 303 seats won, with the margin of victory above 5 per cent in 259 seats (over 85 per cent of total seats won). The opinion polls show the newly formed coalition, INDIA (Indian National Developmental Inclusive Alliance), may struggle to gain voter share as BJP's dominance seems to be continuing in the 2024 elections as well," it said. It said any market underperformance triggered by election results, historically, tends to reverse in the medium to long term, as investors and businesses adapt to new government policies.
"Despite the potential for near-term election-driven uncertainty, we reiterate our view that any sharp weakness in equities could offer buying opportunities," it said.
Political uncertainty UBS said the opinion polls before elections suggested further seat gains for the BJP party. But the actual progress in the first five phases of the election has been less clear, UBS said. The lower voter participation so far and possible loss of some voter share in key states such as Maharashtra, Karnataka, West Bengal and Bihar due to regional political uncertainty have raised questions about the NDA's ability to secure a third term, it noted.
PM Modi and Union home minister Amit Shah recently allayed investor concerns a bit and suggested a strong win for BJP in the ongoing general elections.
Four scenarios: From BJP's absolute win to INDIA govt
UBS in it scenario 1, based on the opinion polls, assumed the BJP will retain the single-party majority. In this scenario, markets will likely remain confident about policy continuity, but the likelihood of further reforms including on disinvestment, the land bill, and the uniform civil code could depend on the number of seats won. Overall, it believes the financial market sentiment will likely remain positive.
"In scenario 2, we assume the BJP fails to retain its single majority, but would form a government with the NDA with a majority (> 272 seats). In this scenario, markets could be slightly less confident about policy stability as fiscal consolidation could be slower than envisaged. There could be pressure from other political alliances, but overall macro stability could still persist. We could see a mixed impact on financial markets," it said.
In the third scenario, UBS assumed a hung parliament as the NDA fails to get the majority (
"A less decisive government could lead to lags in implementing reforms. We envisage risks of policy paralysis, which could negatively impact financial markets," it said.
Lastly, in the fourth scenario, UBS assumed a change in government as newly formed coalition INDIA gets the majority (>272 seats). In this scenario, there could be significant market uncertainty with the potential for more abrupt policy changes, it warned.
"We see high risks of reversal of some reforms implemented by the NDA. Financial markets could potentially see a sharp knee-jerk reaction due the uncertainty that comes along with a change in government," it said.