Unwieldy poll coalition ahead, say brokerages

At least three brokerages said the majority party in the event of a coalition is likely to be the BJP

Elections are months away, but brokerages believe that the dice might have already been cast in favour of a fractured coalition at the Centre.

A report by CLSA, Precarious political uncertainty weighs on India, suggested that neither of the two large parties would be able to garner enough seats for a decisive victory.

“The Congress and the opposition Bharatiya Janata Party (BJP) are walking a tightrope, and neither is likely to win convincingly in next year’s general elections. India’s next government is likely to be weak, made up of regional parties, each with its own agenda and incapable of pursuing essential bold reforms,” said the report.

Another report by Ambit suggested coalition politics will come to the forefront after 2014, with no major party being able to form a government without partnering with a large number of regional players.

“While the BJP’s 160 seats could rise to 180 in the October CSDS (Centre for the Study of Developing Societies) poll (thus enhancing the party’s mascot’s chances of becoming the PM), the BJP would need to ally with at least eight other parties.

Its most likely partners appear to be Shiv Sena, Akali Dal, TMC (Trinamool Congress), AIADMK (All India Anna Dravida Munnetra Kazhagam), BSP (Bahujan Samaj Party), BJD (Biju Janata Dal) and the TDP (Telugu Desam Party). To this, the BJP would need to add even smaller parties (such as Rashtriya Janata Dal and Janata Dal-United) to reach 272,” said the Ambit report titled ‘Lok Sabha Elections 2014’.

Jefferies India in its report, Within the margin of error, said the narrow margins of victory in Indian elections and the 100 million first-time voters in 2014 would be key in deciding the outcome.

It added that a three per cent vote swing could cost the ruling coalition over a hundred seats.

At least three brokerages have said that the majority party in the event of such a coalition is likely to be the BJP.

Brokerages also took note of the fact that large coalitions have acted in a reformist way in previous years. Ambit noted that the government undertaking most reforms was P V Narasimha Rao’s 1991 minority government.

CLSA, too, said that growth did not fall during the coalition years between 1997 and 2000, but preferred to stick to safer stocks nevertheless. It suggested that defensives would be the best bet ahead of elections since cyclical would only do well if either of the two parties come to power with a strong mandate.

“A third-front coalition government would impact equity markets the most. A defensive portfolio would work best in such a scenario…  we see a 60-70 per cent probability of a weak, indecisive coalition coming to power and hence, we remain cautious. We prefer exporters and stocks with revenue and earnings visibility,” it said. CLSA said it preferred exporters and stocks with revenue and earnings visibility such as Tata Consultancy Services, Lupin, PowerGrid, Reliance Industries, Zee Entertainment, Tata Motors and ITC.

Among cyclicals, it advises ICICI Bank, IndusInd Bank, Larsen & Toubro, Maruti and Sobha for their robust business and valuation support.

WHAT THE BROKERAGES BELIEVE...

* Neither one of the two large parties will be able to garner a decisive victory in 2014

* 60-70% probability of a weak, indecisive coalition government made up of regional parties, each having their own agenda and incapable of bold reforms

* 100 million first-time voters in 2014 would play a key role in deciding the outcome

* Even a 3% vote swing could cost the ruling coalition not less than a hundred seats