Financial aficionados may brace themselves for a tantalizing trajectory in the Sensex, marked by a potential surge of up to 10% leading up to the impending 2024 general elections. This crescendo, driven by expectations of a triumphant Bharatiya Janata Party (BJP)-led government, could usher in a climate of market optimism. However, as electoral outcomes loom large, the Sensex, akin to a pendulum, could oscillate dramatically within a daunting range spanning from a positive 5% to a menacing negative 40%.
These revelations stem from an astute research report, dated September 3, emanating from the global brokerage powerhouse, Morgan Stanley.
The Sensex, culminating at a figure of 65,387.16 on September 1, appears poised to embark on a potentially exhilarating journey if current political trajectories remain unaltered. Under this scenario, a 10% increase would bestow the benchmark index with a formidable 71,926 by May, all contingent upon the non-expedition of the election dates. However, the prospect of accelerated election dates could significantly condense this market movement into a more compressed timeframe.
Dubbed “One Billion Voters: Will They Please the Market?,” the report underscores the underlying volatility, cautioning, “If we are right about pre-election market move, then depending on what the election result is, we believe the market has the potential to swing between +5% and -40% – a wide range underpinning how important the elections could be to market in short run. The wild swing has historical precede-nce though we think it could be more acute this time around.”
A sobering perspective emerges with a contemplation of a 40% plummet, envisaging a Sensex slump to the precarious level of 43,155. For context, harken back to the year 2004, when election results deviated from market expectations, leading to a staggering 17% freefall in the Sensex within a single trading session.
Navigating the Nexus of Incumbency and Prosperity
The report insightfully acknowledges that the tenure of the incumbent government can prove propitious if the electorate perceives a climate of prosperity. Nevertheless, the challenge lies in the nuanced disparities of prosperity across distinct voting cohorts. In addition to overarching metrics like economic growth and inflation, pivotal indicators encompass poverty levels, agricultural distress represented by farmer suicides, rural India’s terms of trade, the distressing issue of female foeticide, infant mortality rates, and the effectiveness of government welfare schemes. Given this multifaceted landscape, the government retains leeway to introduce strategic policies before elections, thereby influencing voters’ inclinations toward a particular direction.
Morgan Stanley’s Prognosis for Post-Election Landscape
Post the electoral denouement, Morgan Stanley anticipates a 5% upswing in the Sensex, manifesting within a three-month timeframe, should the incumbent BJP secure approximately 260 seats out of the 543 in the Lok Sabha (the lower house of Parliament). This scenario aligns with the present consensus based on the available information. However, the market’s pricing dynamics could undergo radical shifts should the opposition manifest a robust coalition early next year.
Alternative Scenarios: Coalition Dynamics
Divergent electoral outcomes could set off varying trajectories in the market:
1. If the BJP attains 240 seats but manages to form a government in conjunction with coalition partners, the benchmark index could experience a downward correction in the range of 5-7%.
2. In the event of the incumbent BJP losing ground or securing around 225 seats, the market may nosedive by a substantial 20-25%. However, eventual recovery may manifest if the anchor party maintains a robust presence in the House.
3. The most grim scenario unfolds if the incumbent loses and the leading party garners fewer than 200 seats, resulting in a feeble coalition at the center with the leading party playing a subordinate role. Under such dire circumstances, the market could plummet precipitously by 30-40%. This doomsday scenario paints a bleak picture, implying a descent from the towering heights of 71,926 to the precarious abyss of 43,155 for the Sensex.
This apocalyptic vision is contingent on the assumption that one-third of the index’s value is eviscerated. Within a fragile coalition, predictability regarding economic growth and inflation tends to erode, despite the preservation of an adequate growth rate. Moreover, execution efficiency could potentially be imperiled.
Tailoring Portfolios to Navigate Uncertainty
The report prescribes an agile approach to portfolio construction, contingent upon an investor’s anticipation of the four potential scenarios:
1. An investor forecasting a decisive BJP victory should consider overweighting sectors such as consumer discretionary, financials, industrials, and information technology.
2. In the event of a worst-case scenario materializing, characterized by a coalition government, an investor should pivot towards overweighting sectors like consumer staples, energy, healthcare, information technology, and materials, among others.
The report underscores that coalition governments don’t inherently correlate with subpar economic growth. Over the past eight elections spanning 32 years, India has witnessed only two majority governments, in 2014 and 2019. Furthermore, historical data reveals that even coalition governments, as observed in 1996 (United Front) and 1998 (led by the BJP), had a lasting influence on the nation’s economic growth, with an average real GDP growth rate of 6.2% p.a. since 1993.
In this fascinating economic backdrop, the MSCI India index has surged by an impressive 7.3 times in USD terms from January 1993 to July 2023, outpacing the MSCI ACWI index at 4.7 times and the MSCI EM at 2.3 times. The BSE Sensex, reflecting this dynamic period, has exhibited an extraordinary 25-fold increase.
As India stands at the cusp of electoral dynamism, the markets brace for an exhilarating yet tumultuous journey, oscillating between exuberance and trepidation, all contingent upon the whims and fancies of the electorate.