Where to invest ahead of 2019 general elections? Morgan Stanley answers

It is unlikely that the market is as optimistic as it has been in the past going into the 2019 elections, Morgan Stanley says

With the markets yet to price in the outcome of the general elections scheduled for May 2019, investors would be better off adding defensive and cyclical counters with a focus on large-cap stocks, suggests Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi. 

“It is unlikely that the market is as optimistic as it has been in the past going into the 2019 elections. Post-election performance is purely a function of what's been priced in ahead,” they say.

While Morgan Stanley rules out the possibility of general elections being advanced given an overall improvement in the economy, they expect a weak coalition government to impact execution of projects / policies and also have a bearing on growth and inflation.

Historically, markets been optimistic in the run-up to the general elections. Since 1991, every election has been preceded by a coalition government; hence, the market has had room to be hopeful of a stronger government, the research house says. 

“A minority government has not necessarily been bad for stocks. Eventually stocks respond to growth and inflation – economic metrics that are a function of policy choices and global factors. This time, however, the market enters the 2019 polls with a majority government already at the helm, so it has to deal with the prospects of a weaker government at the centre,” Morgan Stanley says.

In this backdrop, Morgan Stanley advises investors to take a call on the possible outcomes – absolute majority for one of the national parties which means winning over 260 seats like the Bharatiya Janata Party (BJP) led National Democratic Alliance (NDA) did in 2014; around 220 seats for two major national parties (BJP or the Indian National Congress); a coalition with the lead party winning around 180 seats and a weak coalition with the lead party only in a supporting role – and invest accordingly.

“The direct way to handle the problem is to take a view on the likely election outcome and the ensuing market reaction and tailor the portfolio to match the view: Hence, buy beta and leverage if one believes in a better-than-expected election result and vice versa,” Morgan Stanley says.

The more conservative approach, according to the research house, is to prepare the portfolio for various scenarios. Though such an approach does not guarantee outperformance for any particular outcome, but is likely to protect portfolios from extreme performance.

In a best-case scenario to which Morgan Stanley attaches 30 per cent probability, pegs the S&P BSE Sensex at 41,500 levels in the next 12 months. Their base-case (50 per cent probability) and bear-case (20 per cent probability) target for the index stands at 35,700 and 25,000 respectively.

BULLS AND BEARS
	Scenario 1: Bull case	Scenario 2	Scenario 3	Secnario 4: Get defensive	Current positioning
	Buy domestic cyclicals, rate sensitives	Buy consumption, global stocks	Go closer to the benchmark	Weak coalition with only supporting role by lead party
	Lead party with circa 260+ seats	Lead party with 220 seats	Avoid high beta, cyclicals
Sensex path for the coming 12 months	Our bull case of 41500	Our base case of 35700	Somewhere between base and bear case	Our bear case of 25000
Consumer Discretionary	OW	OW	UW	UW	OW
Consumer Staples	UW	OW	OW	OW	UW
Energy	UW	UW	Neutral	UW	UW
Financials	OW	Neutral	UW	UW	OW
Healthcare	UW	UW	Neutral	OW	UW
Industrials	OW	Neutral	UW	UW	OW
Information Technology	UW	OW	OW	OW	OW
Materials	OW	OW	Neutral	UW	UW
Telecom	UW	Neutral	Neutral	OW	Neutral
Utilities	UW	UW	OW	OW	UW
Source: Morgan Staney report
OW = Overwight
UW = Underweight