Markets and elections: Bernstein decodes LS result impact on D-Street

In a report, Bernstein has discussed various election scenarios and its implications for the market and the economy

With the Lok Sabha election results less than two weeks away, the markets are sitting pretty with the benchmark Nifty and the Sensex closing at record highs. India’s market capitalisation also breached the historic $5 trillion mark.

On Thursday, it finished at Rs 420 trillion ($5.05 trillion). Experts believe the stock markets are sanguine about incumbent Narendra Modi-led Bharatiya Janata Party’s (BJP’s) strong showing in the ongoing general elections, the results for which will be declared on June 4.

In a report, Bernstein has discussed various election scenarios and implications for the market and the economy. 

The brokerage sees a high probability of the BJP winning close to 300 seats and the National Democratic Alliance (NDA) about 340 seats. 

If this plays out, Bernstein believes the benchmark Nifty will breach 23,000 but profit-taking could bring it back below that level. Interestingly, after hitting a high of 22,993.6, the Nifty last closed at 22,967.6.

While the BJP’s election victory has largely been priced in, a surprise verdict should send shockwaves across the market. Bernstein says BJP winning less than 240 seats could lead to “heavy profit booking” and low or negligible returns for the rest of the year.

The brokerage says the new government’s 100-day agenda and expectations from the Budget will act as “support catalysts” for the markets in the near term. Following are the four scenarios that could shape the market performance and the economy. 

BJP: >290 

NDA: >340

Market implications

Immediate market rally followed by short-term profit booking. High single digit or low double digit returns for Nifty this year

Fiscal discipline

Staying in check. Comfo­rta­b­le road towards 4.5% by FY26

Inflation

Seasonal variation due to fo­od items, will mostly stay in RBI’s comfort range of 2-6%

Manufacturing

A heavy focus will continue, money will be diverted from subsidies towards more incentives for manufacturing firms

BJP: 260-290

NDA: 290-340

Market implications

Mild profit booking near term. High single digit market returns for this year

Fiscal discipline

No major impact on current plans. Government likely to reduce it to 4.5% by FY26

Inflation

Seasonal variation due to food items, will mostly stay in RBI’s comfort range of 2-6%

Manufacturing

Existing schemes will likely continue. Government may slow down the infusion of funds into new schemes, but FDIs will still remain strong
 

BJP: 240-260

NDA: 270-290

Market implications

Moderate to heavy profit booking in near term. High single digit market returns for this year

Fiscal discipline

Revenue expenditure starts coming into picture, with lower income and higher expenses. Fiscal path will become longer, having an impact on INR

Inflation

The focus shift to freebies or tax breaks will not have a major bearing on inflation, as the government is likely to be prudent in its policies. Any surging food inflation will continue being clamped down by export bans, opening of buffer stocks, etc

Manufacturing

Some business sentiment may be diluted. Manufacturing push may be more towards MSMEs. Some large corporate deals may be hampered. Possible impact on FDIs

BJP: <240

NDA: <270

Market implications

Heavy profit booking in near term. Low or negligible returns for markets this year

Fiscal discipline

Heavy government outlay on salaries, increased MGNREGA wages and UBI will significantly increase fiscal deficit - likely to go beyond 5.2% for current as well as next fiscal

Inflation

10 kg free food distribution will lead to depletion of stocks and UBI/MGNREGA wage increase will raise demand for other goods. Inflation likely to go beyond 6% in the near term

Manufacturing

Near term decline in business sentiment. Tax breaks and subsidies for poor may be financed by more taxes on corporates or rich. FDIs will fall