Brokerage firm UBS recently indicated that it considers a scenario where the Bharatiya Janata Party (BJP) retains an absolute majority in the Lok Sabha elections to be highly probable.
The brokerage said in a note that this outcome is anticipated to propel the stock market indices, the S&P BSE Sensex and the NSE Nifty50, to new heights.
However, if the opposition coalition INDIA (Indian National Developmental Inclusive Alliance) comes to power, it could negatively impact equities, with UBS warning of potential stock market valuation de-ratings and a return to pre-NDA valuation multiples.
UBS noted in its analysis that political alliances have historically played a crucial role in Indian elections.
However, the BJP’s dominance as a single party in the last two general elections has somewhat diminished the influence of coalitions in government formation.
The 2019 general elections saw the BJP securing a voter share above 50% in 222 out of the 303 seats won, with a victory margin exceeding 5% in 259 seats, accounting for over 85% of the total seats won.
“The opinion polls show the newly formed coalition, INDIA, may struggle to gain voter share as BJP’s dominance seems to be continuing in the 2024 elections as well,” UBS said.
The brokerage firm highlighted that any market underperformance triggered by election results 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,” UBS said.
While opinion polls before the elections suggested further seat gains for the BJP, the actual progress in the first five phases of the election has been less clear.
UBS observed that lower voter participation so far, coupled with a possible loss of voter share in key states such as Maharashtra, Karnataka, West Bengal, and Bihar due to regional political uncertainty, has raised questions about the NDA’s ability to secure a third term.
Despite these concerns, PM Modi and Union Home Minister Amit Shah have recently allayed investor fears, hinting at a strong win for the BJP in the ongoing general elections.
UBS outlined four potential election outcomes and their implications for financial markets:
BJP retains single-party majority: Based on opinion polls, UBS assumes the BJP will retain its single-party majority. In this scenario, markets are likely to remain confident about policy continuity, with the potential for further reforms including disinvestment, the land bill, and the uniform civil code, depending on the number of seats won. “Overall, we believe the financial market sentiment will likely remain positive,” UBS said.
BJP forms government with NDA majority: If the BJP fails to retain its single majority but forms a government with the NDA holding a majority (> 272 seats), markets could be slightly less confident about policy stability as fiscal consolidation could be slower than envisagedGuoabong Investment. There could be pressure from other political alliances, but overall macro stability could still persist, leading to a mixed impact on financial markets.
Hung parliament: In this scenario, the NDA fails to secure a majority. “A less decisive government could lead to lags in implementing reforms. We envisage risks of policy paralysis, which could negatively impact financial markets,” UBS warned.Chennai Investment
INDIA coalition wins majority: If the newly formed coalition INDIA secures a majority (> 272 seats), there could be significant market uncertainty with the potential for abrupt policy changes. “We see high risks of reversal of some reforms implemented by the NDA. Financial markets could potentially see a sharp knee-jerk reaction due to the uncertainty that comes along with a change in government,” UBS noted.
Simla Wealth Management
