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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

Puneet Wadhwa  |  New Delhi 

saving schemes, investment

With the yet to price in the outcome of the 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 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 Post-election performance is purely a function of what's been priced in ahead,” they say.

While rules out the possibility of 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, been optimistic in the run-up to the 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,” 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 (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 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

First Published: Tue, April 17 2018. 22:36 IST
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