Stock markets seem to be unsure whether a majority government will be re-elected when the general elections are held next year amid an overall fall in the optimism level when compared to some of the earlier months, according to Morgan Stanley.
“Elections present tail risks, especially if the outcome counters what is priced in. The market appears unsure of whether India will re-elect a majority government in 2019. If this uncertainty rises, we think stocks will struggle to rise in coming months,” Morgan Stanley said in a report.
It is unlikely that the market is as optimistic as it has been in the past, going into the 2019 elections, it added.
According to the global financial major, the “world’s biggest democratic elections” are 12 months away and the market is likely to start pricing in an election outcome in the coming months and the biggest investor concern is a weak coalition government, which would hamper quick administrative decisions leading to further political uncertainty. Incidentally, the 30-share Sensex has fallen more than 2,000 points since touching an all-time intra-day high of 36,443.98 in January. On Tuesday, the benchmark closed 89.63 points higher at 34,395 points. The probabilities in terms of the outcome include an absolute majority, a weak majority, a firm coalition or a weak coalition, according to the report by Morgan Stanley equity strategists Ridham Desai and Sheela Rathi.
Historical trends
Interestingly, while historical trends have shown that stock markets approach general elections with a “tinge of optimism” and hence do well in the run-up to the polls, this time it could be an exception as the country will go to the polls with a strong majority government at the Centre. “... there is a major change versus history for the forthcoming elections. Since 1991, every election has been preceded by a coalition government; hence, the market has had room to be hopeful of a stronger government. The market enters the 2019 polls with a majority government already at the helm, so it has to deal with the prospects of a weaker government at the Centre,” stated the report.
The report, however, added that a minority government has not necessarily been bad for stocks and eventually stocks respond to growth and inflation – economic metrics that are a function of policy choices and global factors.
Meanwhile, indicators that could play an important role in determining the election results include two-wheeler sales, tractor sales, rural wage growth, inflation, minimum support prices, farmer well-being, direct benefit transfers, and jobs growth, as per the report.
