Benchmark indices Nifty, Sensex have rallied around 8% so far this year, and the 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, the brokerage said in a note
According to the foreign brokerage Morgan Stanley, India stock market has historically approached elections with optimism and that it sees a familiar pattern this time around, with the market pricing in a result that favours continuity in the government with a majority. The foreign brokerage expects the market to rise 10% by May 2024, and see a potential for the market to swing in a wide range, depending on the outcome
The voting for General Election next year will likely commence in April 2024, with the counting and the release of results likely on a single day in late May. This, Morgan Stanley said, assumes that the election dates are not advanced, which is a possibility. Advancing the election date could concentrate the market move into a shorter period, it said
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According to Morgan Stanley, the domestic market has the potential to swing between 5% and minus 40% in three months post 2024 general elections. While expecting the stock market to be pricing in a result that favours continuity of incumbent NDA with a majority, Morgan Stanley sees about 10% rise in Sensex and Nifty by May 2024 in the runup to the elections. Post elections, however, the short-term trend would depend on the outcome, it said
In the first scenario, where the incumbent comes up with 260-plus seats, Morgan Stanley sees a further 5% upside for Sensex in three months post elections. The forecast could change if the opposition demonstrates a strong coalition by early next year, Morgan Stanley said
In scenario 2, Morgan Stanley expects the lead party, NDA, to get less than 240 seats. This would mean the incumbent falls short but still forms a government with its allies. Morgan Stanley said this is less than ideal for the stock market, resulting in 5-7% drawdown for benchmark indices. The market, in this case, could be concerned about the compromises that need to be made on economic policy to make a coalition government work
In scenario 3, Morgan Stanley sees the leading party getting less than 225+ seats. "The market may ultimately settle higher but it immediately experiences a sharp 20% correction in this scenario. The market's concern will be around policy stability and choices and it could also be concerned about foreign sentiment and flows," Morgan Stanley said
In the last scenario, Morgan Stanley sees a weak coalition with participation of a lead party only in a supporting role with less than 200 seats. "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," it said
According to analysts at Morgan Stanley, if I.N.D.I.A. were 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 its upside forecast would not materialise. That would be "the worst possible outcome for the equity market, according to our assessment of likely scenarios", it said
According to Morgan Stanley, other factors, such as global growth, global interest rates, and crude oil prices, could also alter the price forecast. The brokerage expects the domestic growth to remain strong but a global slowdown is a risk. While Indian equity market correlation to US stocks has declined, any sharp decline (or rise) in US stock prices would influence the market in India, it said
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."
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