Brokers too join the poll forecast bandwagon

If you thought that exit polls were shaking the market up and were not sure what its implications would mean in the long term, rest easy. Top brokerage houses in India are coming out with their own reports on politics and its implication on the market.

Political uncertainty seems to have overshadowed all other fundamentals, shaking up calculations of the most astute market analyst. A change is something that the market does not take too kindly to, say senior brokers.

Merrill Lynch, which put out its report after the second phase of elections, has an interesting array of permutations and combinations of the government set up and the Sensex levels.

According to the report, if there is a BJP or a Congress-led coalition with 300 seats and more, the index is expected to touch 7000. If the coalition gets seats between 270 and 300, the index is expected to be in the 6250-6750 range. If the seats are between 250 and 270, the Sensex levels have been forecast in a 5500-6250 range.

On the other hand, if there is non-BJP, non-Congress government at the centre, the Sensex is expected to slump to below 5000 levels. Analysts said the stability of the government is dependent not on who is leading the coalition but on the number of seats.

In its report, I-Sec said there is a 50 per cent probability of the BJP-NDA coalition falling short of majority by 30 seats. In this case, the market undercurrent would be stable and the Sensex would range between 5500 and 6000.

In this scenario, there would be 'give and take' between the coalition partners and compromise would be only on subsidies and PSU divestments. Other reforms could be in early June.

The brokerage sees a 25 per cent chance of the NDA getting a 51 per cent majority in which case the index would shoot past 6000 and may even hit 7000, and the reforms programme would be on schedule.

The other 25 per cent probability is of a third front coalition, in which case the index would range between 5200 to 5500, and everything - the prime minister, finance minister, fiscal deficit, subsidies - would be contentious issues.

Enam Securities' latest India strategy report says political winds suggest the return of the NDA government with a reduced majority.

It adds that the markets fear this would mean increase in the time taken to reach a consensus on development issues, slackening the pace of growth and investments. This would put a lid on the appreciation of the rupee and the Sensex.

However, Nandan Chakraborty, head - research, Enam, said: "The direction of reforms remains positive. More importantly, the spirit of consumerism and entrepreneurship - fed by demographic changes and ample liquidity - remains a secular trend. Thus, even if markets remain rangebound in the near term, investments based on corporate entrepreneurship and consumerism will continue to reward investors."

The report recommends underweight PSUs, fully priced cyclicals and overweight auto, telecom, retail, housing, banking, IT, pharma and natural resources stocks.

Before the elections began, there was a broad consensus among most segments in the market that the NDA government would return to power, thanks to the euphoria generated by the 'India Shining' campaign.

But with the exit polls after the first two phases of elections predicting tough times for the NDA, broking firms are advising a cautious approach to investment.

Khandwala Securities in its April weekend report has mentioned various election outcomes and their possible impact on the markets. The most optimistic scenario is if the shape of the government maintains its status quo. However, there is no assurance that the situation is best in the long term.

In case the NDA gets about 260-280 seats, that could turn out to be the most tough situation for the market as uncertainty of government formation will last longer.

In case the NDA gets less than 250 seats, the possibility of new partners demanding important roles in the government to affect overall functioning can pose a serious challenge to the formation of the government. The situation will be difficult for the market in the short as well as long run, the report warned.

In case the Congress is voted to power, it will trigger uncertainties in the market in the short run, with little impact on the long run.

It is to be noted that at the broad level, there are hardly any differences of opinion between the Congress and the BJP as far as economic reforms are concerned, the report noted.