Hung Parliament, NDA win or loss: Stock strategy for poll outcome scenarios

Ambitious targets were tactfully set by BJP to ward off complacency among the BJP and NDA cadre; it had become a talking point in the absence of the strong wave, as seen in 2014 and 2019: JM Financial

The markets turned into a sea of red on Tuesday after the initial leads for the ruling Narendra Modi-led National Democratic Alliance (NDA) disappointed Dalal Street. The Sensex lost over 2,500 points in early trade, wiping off almost all the gains it had made a day earlier before recovering some lost ground.

Earlier this year, Prime Minister Narendra Modi had set a target of over 400 seats in the Lok Sabha elections, which the most market participants had found a tough ask. However, they still expected the NDA to comfortably move past the 340-mark and form the next government.

“Ambitious targets were tactfully set by the BJP to ward off complacency among the BJP and NDA cadre; moreover, it has become a talking point in the absence of the strong wave, as seen in 2014 and to some extent in 2019 as well,” wrote analysts at JM Financial in a recent note.

How will the markets react to NDA loss? 

In a scenario where the BJP fails to retain its single majority, but would form a government with the NDA with a majority (> 272 seats), the markets could be slightly less confident about policy stability as fiscal consolidation could be slower than envisaged. There could be pressure from other political alliances, but overall macro stability could still persist. We could see a mixed impact on financial markets. (UBS)

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. Private sector will be pushed to participate in infra, which will lead to only the most viable projects emerging as others are shelved. Heavy profit booking near term. Low or negligible returns for markets this year. (Bernstein)

A BJP loss will be our 'bear case' scenario for the markets. The Sensex had lost over 17 per cent in two days. A similar outcome (a surprise loss) can see worse show for the markets when compared to 2004. (Jefferies)

How will the markets react to a hung Parliament?

A hung parliament scenario where the NDA fails to get the majority (<272 seats), could trigger higher market uncertainty with the potential for prolonged political negotiations. A less decisive government could lead to lags in implementing reforms. We envisage risks of policy paralysis, which could negatively impact financial markets. (UBS)

How will the markets react if the I.N.D.I.A bloc wins?

A change in government as newly formed coalition INDIA gets the majority (>272 seats), could trigger significant market uncertainty with the potential for more abrupt policy changes. We see high risks of reversal of some reforms implemented by the NDA. Financial markets could potentially see a sharp knee-jerk reaction due the uncertainty that comes along with a change in government. (UBS)