Markets May Tank 40% If...

The outcome of the general elections, the Morgan Stanley note says, has enough firepower to sway the markets on either side.

Morgan Stanley sees up to a 10 per cent rise in the Indian markets ahead of the general elections in May 2024, in anticipation of 'continuity and majority'.

The equity markets, it said, typically approach elections with optimism, and this time is likely to be no different.

It, however, cautioned that the markets may decline up to 40 per cent if the outcome is unfavourable.

'Historically, the Indian market approaches elections with optimism. We expect it to follow a familiar pattern this time around -- pricing in a result that favours continuity in government with a majority. However, this is contingent upon how successfully the Opposition shares the seats that pose a threat to the incumbent,' wrote analysts at Morgan Stanley, led by Ridham Desai, their head of India research and India equity strategist, in a report co-authored with Sheela Rathi and Nayant Parekh.

'Advancing the election date could concentrate the market move into a shorter period,' Desai, Rathi and Parekh added.

The forecast assumes the election process will start in April next year and will end with results being announced around the third week of May.

It also assumes that the general elections are not advanced to an earlier date, which is always a possibility.

'Advancing the election date could concentrate the market move into a shorter period. Back in 2004 when the election results were against what the market was pricing in, the Sensex fell 17 per cent in a single trading session,' Desai, Rathi and Parekh said.

The defining moment, Desai, Rathi and Parekh said, could be if and when the 26-party Opposition alliance, known as INDIA, is able to strike a seat-sharing deal.

'This is something we will know only closer to the election date,' the note said.

The outcome of the general elections, Desai, Rathi and Parekh's note said, has enough firepower to sway the markets on either side.

'If we are right about the pre-election market move, then depending on what the election result is, we believe the market has the potential to swing between +5 per cent and -40 per cent -- a wide range underpinning how important the elections could be to the market in the short run,' Desai, Rathi and Parekh stated.

'The wild swing has historical precedence, although we think it could be more acute this time around,' Desai, Rathi and Parekh added.

Investors, it advises, can use 'options (derivative strategies)' to hedge against volatility.

For others, it recommends a barbell portfolio that is overweight on domestic cyclicals, rate sensitives, and technology.

US stock markets, interest rates, growth, crude oil prices, and inflation are some of the factors, Morgan Stanley said, will also play a key role in the Indian markets.

There are three cohorts, Desai, Rathi and Parekh believe, that will probably affect the election outcome disproportionately -- stock market investors, social media users (over 500 million), and first-time voters (around 130 million).

These are not mutually exclusive pools but are mostly larger in size now than they were in 2019, which is especially true of stock market investors (now estimated at 100 million) given the surge in the number of equity investors over the past five years.

'There is limited information available,' Desai, Rathi and Parekh explain, to say how these groups will vote in the forthcoming elections, although it is likely that the stock market cohort, which has amassed significant wealth over the past five years, will vote in favour of continuity in administration as it is more likely to ensure stock market stability.'

Feature Presentation: Aslam Hunani/Rediff.com