Lok Sabha elections 2019: Brokerages begin to pencil coalition scenarios

While some have suggested downside to the markets in the short-term for coalitions, long-term historical returns are higher than majority governments

A number of brokerages have outlined scenarios with potential downside if a coalition government were to come to power.  A Business Standard analysis of governments since 1984 showed that those with among the highest returns were coalition ones. The last majority government, from 1984-89, showed the Sensex giving 20.8 per cent compounded returns. This is lower than the subsequent coalition government that returned 52.4 per cent. The one that followed also gave higher returns of 23.3 per cent.
 
Some brokerages have warned of volatility if the 2019 election results in a fractured mandate. Kim Eng Securities India has a Nifty target of 10,500 over the next 6-12 months. This depends on a rise in earnings, growth, and industrial production, along with a favourable election.
 
All of this together appears difficult at present, according to analysts Jigar Shah, Neerav Dalal and Vishal Periwal.

“....the NIFTY fair value would be 9,197 (-12 per cent), which could be the worst-case scenario,” said the December 12 India Strategy report; give the ruling Bharatiya Janata Party manages less than 200 seats.
 
“Domestically, the main risk is of an unfavourable outcome. If an unstable coalition were to come into power later this year, Nifty may decline to 9,000,” said Rajiv Singh, chief executive officer (broking business), Karvy Stock Broking as part of the brokerage’s Investment Strategy report 2019.
 
A UBS Securities India Market Strategy report suggested varying targets ranging from 9,400-11,900 based on a BJP-government taking charge, or a coalition/single party one. A change in government in favour of a Congress-led coalition pushes this range to 8,800-11,300. It’s lower at 8,200-10,000 for a third-front coalition.
 
It said some believe that fundamentals are unaffected irrespective of the government. It also noted that the third front government beat expectations in 1997, with several reforms in its budget besides sharp tax cuts. However, any uncertainty around such a government could impact markets, according to the report.
 
“…we believe political and policy certainty, apart from a reform narrative, help both business and market sentiment. It could also drive market multiples…. The reverse also holds, in our view,” said the report, authored by analyst Gautam Chhaochharia, strategist Rohit Arora and economist Tanvee Gupta Jain.
 
Economic indicators have been broadly agnostic of the kind of central government formed. The UBS report showed consolidated fiscal deficit (including state and Central) was 6-9 per cent over the last five governments (including the current one).

One of the lowest was during the third front government, when it was 6.6 per cent.

 
Earnings growth was lowest in the current government at 5.3 per cent. The third front saw average earnings growth of 12 per cent. The first NDA government until 2004 saw earnings growth of 18.9 per cent.
 
The report further said that there was a de-rating and underperformance of equities during the third front, which could be repeated. Indeed, market returns were a compounded 1.2 per cent during 1996-98, showed the Business Standard analysis.
 
But those managing money believe a longer-term outlook is important.
 
“It’s very nice to think that coalition governments don’t do well and majority governments do very well, but both kind of governments could succeed or fail. There may be a reaction in the first few months, but markets will look to macro-fundamentals and other factors over a 2-3 year period,” said Prashant Sharma, chief investment officer at Aviva Life Insurance Company.