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 center. Although, a minority government has not necessarily been bad for stocks, said the report.
The world's biggest democratic elections (93 crore voters) are 12 months away and the market is likely to start pricing in an election outcome in the coming months.
The biggest investor concern: a weak coalition government, one loath to quick administrative decisions, inducing political uncertainty, highlights global investment bank, Morgan Stanley in a note.
History suggests that stock markets approach general elections with a tinge of optimism. Thus, stocks tend to do well in the run-up to elections.
However, there is a major change versus history in the forthcoming elections. Since 1991, every election was preceded by a coalition government, and hence, the market during those phases had room to be hopeful of a stronger government. On the contrary, market is entering 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 Center post elections.
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Although, a minority government has not necessarily been bad for stocks, said the report. Eventually, stocks respond to growth and inflation – economic metrics that are a function of policy choices and global factors.
Morgan Stanley lists out 4 possible outcomes from upcoming general elections:
Scenario 1:
An absolute majority for one of the national parties, which means winning around 260+ seats like the BJP-led NDA in 2014.
Portfolio Creation: This is bull case scenario, and investors should be better off buying domestic cyclical as well as rate sensitive stocks. In this scenario, the S&P BSE Sensex could well touch 41,500 levels, highlights Morgan Stanley report.
Scenario 2:
Around 220 seats for one of the two major national parties (INC or BJP), what we call a weak majority government, like the INC-led UPA in 2009.
Portfolio Creation: This scenario corresponds to Morgan Stanley’s base case scenario. Under this, investors should buy consumption stocks and global stocks. The target range for Sensex is 35,700.
Scenario 3:
A coalition with the lead party winning circa 180 seats. We saw such governments in 1998 and 1999.
Portfolio Creation: Under this scenario, investors should just stick to benchmark stocks and avoid high beta and cyclical. The target range for the Sensex will be in between the base case and bear case targets for the Sensex.
Scenario 4:
A weak coalition with the participation of a lead party only in a supporting role. Such support is from the outside leaving the government vulnerable. 1996 is a good example of such a setup.
Portfolio Creation: The market prices in poor growth and so the portfolio becomes defensive. In between these scenarios, the portfolios gradually lose their cyclical nature and become defensive. The Sensex target under this scenario is closer to 25,000.
