The outcome of assembly elections in five states currently underway will, at best, test the popularity of the Bharatiya Janata Party (BJP) – led government at the centre and its policies, but experts do not extrapolate the outcome to the general elections scheduled for May 2019. This, they say, is due to the fact that the state elections will be fought on local issues rather than a broad-based national agenda.
“Historical analysis suggests that state election results should not be extrapolated for the prediction of a general election. While it remains more likely that two out of these three states will vote for the BJP in general elections regardless of their state election outcome, the state election results should at least take the pulse of public opinion as to the extent to which the mood of the nation still favours the ruling BJP government,” said Sonal Varma, managing director and chief India economist at Nomura in a recent co-authored report with Aurodeep Nandi.
A common thread that runs through most expert opinions is that the markets will remain volatile till the general election outcome is known. Beyond that, the markets will focus on continuity in economic policy and other global and local factors like movement of rupee, crude oil, key interest rates in India and globally, quantum of mutual fund and foreign flows etc.
“The key themes across political parties remain employment, lower expenses (through lower electricity costs), farm loan waivers (Madhya Pradesh and Chhattisgarh) and a host of social welfare schemes. Increasingly, markets are likely to attach more importance to the economic continuity than political continuity,” says Suhas Harinarayanan, Head - Institutional Equities, Research, JM Financial Institutional Securities.
So, what should your portfolio strategy be in this election season?
Analysts at CLSA caution that a non-BJP government post 2019 is not an impossible scenario. In case of a Modi-led coalition, to which they attach a 50 – 55 per cent probability, they advise investors focus on discretionary consumption, select private banks and financials, Reliance Industries (RIL), housing and stocks from the information technology (IT) services sectors as a portfolio strategy.
Ridham Desai, head of India research and India equity strategist at Morgan Stanley agrees and says the assembly polls may have limited bearing on general elections, albeit the market will respond to the polarised results.
“Investors should watch growth, pre-poll alliances and key indicators across inflation, farmer sentiment, direct benefit transfers and jobs to judge how India's state and general elections may pan out. Investors should scout for stocks with growth at reasonable price (GARP) among banks, discretionary, consumption and industrials,” he says.
Gautam Chhaochharia, head of India research, UBS Securities remains overweight the IT services, private Banks (retail liability franchise) and property sectors; and underweight cement, industrials/infrastructure, non-bank finance companies (NBFCs) and small-and mid-cap segments.