As election trends seem to run counter to the exit poll predictions of a clean sweep for Prime Minister Narendra Modi’s Bharatiya Janata Party, markets are crashing, with the Nifty 50 slumping 7.16%.
What Happened: Trends from the Election Commission of India show that the ruling National Democratic Alliance is likely to retain a majority in the Parliament, but the BJP is unlikley to secure the majority mark on its own, raising concerns of policy continuity at the national level.
A number of brokerages have shared their opinions on what the expectations could be if the BJP does not secure a comfortable majority, let alone achieve their slogan of 400 seats.
UBS View: UBS Securities indicated that any unexpected outcome might be perceived negatively initially due to political instability and possible policy paralysis affecting business sentiment and investor confidence. This could lead to knee-jerk reactions in financial markets in the near term, with equity valuations possibly testing pre-NDA levels.
Historically, market underperformance triggered by election results tends to reverse in the medium to long term as markets and businesses adapt to new government policies.
If the BJP fails to retain its single majority but forms a government with the NDA with a majority of over 272 seats, the market could be slightly less confident about policy stability, with slower fiscal consolidation than envisaged, the UBS has said.
See Also: ‘Poll Proof?’ 5 Stocks That Are Bucking The Trend To Surge Amid Election Jitters
It added that despite possible pressure from other political alliances, macro stability could still persist, resulting in a mixed impact on financial markets.
It also said that in the case of a hung parliament where the NDA fails to get the majority, there could be higher market uncertainty with potential for prolonged political negotiations — a less decisive government might lead to delays in implementing reforms, posing risks of policy paralysis and negatively impacting financial markets.
However, UBS also noted that markets tend to revert to fundamentals, and any significant weakness in equities could offer buy-on-dip opportunities.
Bernstein View: Bernstein has said that the pre-election rally had already seen Nifty hitting all-time record high levels above the 23,000-mark, and the market’s focus will eventually return to macroeconomic factors, earnings growth and valuation reasonability. The recent overanalysis and self-induced stress in the markets are the primary reasons for the anticipated relief rally, it said.
The brokerage said that if the BJP gets less than 240 seats and the NDA falls short of 270, funds will be diverted out of infra projects towards social initiatives. The private sector will be pushed to participate in infra, which will lead to only the most viable projects emerging as others are shelved, it added.
It said the market could expect heavy profit booking in the near term in such a scenario, with low or negligible returns for markets this year.
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