Modi winning 2019 polls: Market has priced in 2nd term for BJP, says UBS

The 2019 general elections are still about a year away, but markets seem to have already priced in a second term for the incumbent Narendra Modi-led National Democratic Alliance (NDA) government. In a recent client note, brokerage UBS said while most investors had assigned a ‘very high probability’ of Modi winning the 2019 elections, markets had already priced this in. A K Prabhakar, head of research, IDBI Capital, agrees with the brokerage. “With the valuations already so expensive, we can easily say that markets have priced in Modi's victory. Political stability in the country is a major reason for rising valuations,” he said. "The rally in India started on low crude oil prices and interest rates (globally and locally) but that is reversing in the current scenario. However, the valuations have still not been affected.

The continuation of the govt is the main reason why the rally is sustaining. Other countries have corrected but India not so much,” he added. A UBS study of market performance a year before elections since 1996 shows that the Nifty has gained on four out of six occasions. Even as the government’s reforms have helped investors ignore earnings disappointment over the past four years, the brokerage says stocks and the rupee might be susceptible to uncertainty ahead of the elections. “Modi’s re-election as prime minister with a single-party majority underpins the market’s hopes, reflected in rich multiples,” said UBS in the note. “Modi winning the 2019 election is priced in and (will be) key to sustaining rich multiples.” Before the national elections, crucial states including Karnataka, Rajasthan and Madhya Pradesh will go to the polls. According to UBS, investors should track potential alliances among opposition parties and results as a key pointer for market sentiment. According to Prabhakar, “BJP's victory is almost certain in Rajasthan, where elections will be held in March for 68 seats, cementing its chances for the 2019 elections. The Rajasthan victory will also increase the Rajya Sabha tally of the ruling party, making it easier to pass Bills.” The client note also said the rupee had moved more three months before and less than 12 months ahead of the elections and the currency could trade around Rs 65 a dollar in the next three months, against its previous forecast of Rs 63 a dollar. “The rupee today needs a larger amount of portfolio inflow to stay afloat compared with 12 months ago. The widest trade deficit (in January) since 2013 is not helping the cause,” it added. The brokerage also expects headline CPI inflation to remain in the range of 5.1-5.6 per cent over the next few months and average 4.9 per cent year-on-year in 2018-19. “In our base case, we expect the MPC to keep rates on hold in 2018-19,” UBS said.