Even though the outcome of state polls cannot be entirely extrapolated to what may happen in the general elections scheduled for 2019 as the former are fought more on local issues, most brokerages say that the Bharatiya Janata Party (BJP) now faces an uphill task in rejuvenating the electorate in their favour. Managing caste equations, pre-poll alliances, they feel, will be quite critical going into 2019.
"While the losses for BJP will rob it of some momentum, it is perilous to extrapolate state election results to central government elections. At the central level, Prime Minister Modi maintains overwhelming popularity over his competitors, and anecdotal evidence suggests BJP has more boots on the ground than other parties to mobilise during its re-election campaign. However, we do expect talks of a grand coalition to raise political uncertainty into the 2019 general elections," says Sonal Varma, managing director and chief India economist at Nomura in a co-authored report.
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Analysts led by Aditya Narain of Edelweiss Securities, too, believe that the BJP may find the going tough in 2019 elections given the recent state poll outcome and considering that 60 – 65 per cent of parliamentary constituencies are rural.
“Surely, Modi remains India’s most popular leader and, to that extent, BJP’s performance in the national elections should be better. Nonetheless, challenges for BJP are mounting. The odds of a renewed push in government spending in rural areas over the next six months are high,” he said in a recent report.
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Analysts at Morgan Stanley, too, believe that the state election outcome has given the first indicators of how things may pan out in May 2019 and that investors should not ignore these results, but be cognisant of the complexities of politics. While pre-poll alliances and the growth / inflation mix are key, Maharashtra and Uttar Pradesh are likely to be crucial to the results in 2019, they believe.
Given the recent state poll outcome, most experts expect more populist measures from the central and state governments ahead of the general elections. Analysts at Ambit Capital, for instance, expect the BJP to now provide tangible results of its crackdown on corruption and pump-prime the rural economy and the SMEs (small and medium enterprises).
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“Over and above these policy focus areas, we expect the government to continue to increase control over key institutions in a bid to prepare for the formation of a BJP-led coalition government,” wrote Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital in a report.
Since only a few months remain from a central government policy perspective before the code of conduct kicks in, Gautam Duggad, head of research for institutional equities at Motilal Oswal Securities also expects the government to turn incrementally more populist and provide relief / handouts to different segments of the electorate. Markets, he says, will remain choppy till the general election outcome is known.
So, what should your investment strategy be amid these developments?
Given that the governments usually boost spending ahead of the elections and the flow ebbs post the outcome, analysts at Ambit say that the top-line of FMCG (fast moving consumer goods), media, agricultural inputs and auto sectors responds well to this phenomenon.
“We urge investors to sell overvalued stocks in these sectors closer to the general elections as the uplift in revenue growth of these sectors in the second half of financial year 2018 – 19 (H2FY19) is likely to be ephemeral,” they said.
Duggad of Motilal Oswal recommends large-caps and names with strong earnings visibility, resilience to macro risks and reasonable valuations. “Our top ideas include ICICI Bank, HDFC, State Bank of India (SBI), Maruti Suzuki, Hindustan Unilever (HUL), Titan, Infosys, Larsen & Toubro (L&T), RBL Bank, Team Lease, Indraprastha Gas and Indian Hotels,” he says.