Markets haven't priced in a coalition government, says Morgan Stanley

Investors likely to take a view after state election results next month

Foreign brokerage house Morgan Stanley set up shop in India 25 years ago, in a decade when coalition governments ruled the roost at the center. Whether another one will form the government in 2019 will be a key factor for market in the year ahead.  

“The markets are not going to be at all calm about elections...(they) are going to be all over the place,” said Ridham Desai, head of India research and equity strategist at Morgan Stanley India Company, speaking at an event to mark the organisation’s anniversary in India.  

The market has not yet priced in a fragmented coalition result, according to him, which may result in significant volatility if this turns out to be the case.

“...my judgement is that the market has still not priced in (the) election's outcome. I feel that it will start doing that in the first week of December...market participants I think believe that the state elections results would give them some perspective about the general election results," he said.

He said that December 11 would be a key date in setting market expectations. December 11 is when counting commences for the state elections which precede the one at the center.

“That’s when we know what the market has started believing about 2019, whether it’s going to be a single-party government, or its going to be a coalition government…” he said.

He added that state elections aren’t necessarily the best indicator of government formation at the national level. He also added that coalition governments aren’t necessarily a negative for the economy, though they can result in negative outcomes in the stock market if not already priced in before elections. This has been seen in previous cycles too, he said, when elections resulted in large coalition governments. Markets hardly reacted because this was already expected.

Meanwhile, flows to the equity markets are expected to continue over the longer term. Domestic investors are likely to increase their equity allocations, leading to higher multiples for Indian stocks according to an October 29 India Economics and Equity Strategy report authored by Desai, Equity Strategist Sheela Rathi and Economist Upasana Chachra.

“In turn, this means nominal INR equity returns could be lower that the trailing performance in the coming decade, albeit with lower volatility,” it said.

Morgan Stanley expects market capitalisation to grow slightly slower than the last 25 years.  It believes that growth will be at a rate of 12 per cent over the next decade compared to 14 per cent earlier. This would still result in a market capitalisation of $6 trillion over the next decade, according to the brokerage.

It was $0.09 trillion when Morgan Stanley set up shop in India.
 

On a rough ride?
 

 Volatility likely to rise ahead of elections
Investors will watch for cues from Assembly elections
Surprises may be in store for markets