A Modi victory in 2019 elections key to stock valuations in India: UBS
Most investors have priced in Narendra Modi winning a second term in 2019 general elections, and the optimism about the govt’s economic agenda has helped them brush off weak earnings.Updated: Feb 27, 2018 15:50 IST
Most investors have priced in Prime Minister Narendra Modi winning a second term in the 2019 elections. A change in expectations through this year could derail a rally that’s almost doubled the nation’s equity values since Modi took office four years ago.
UBS Securities India Pvt. says, the optimism about the government’s economic agenda has helped investors brush off weak earnings. And the expensive equity valuations underpin the market’s hopes for Modi returning with a single-party majority, analysts led by Gautam Chhaochharia wrote in a note dated Feb. 23.
While not trying to predict the election outcome, UBS is recommending that investors keep an eye on three dynamics to track the event.
India has a first-past-the-post system, which gives the candidate with the most votes in a constituency a seat in government. Hence, degree of opposition fragmentation is key. The ruling Bharatiya Janata Party may not have won a majority in 2014 had key opposition parties joined hands, the analysts wrote. “If this were to happen in 2019, a majority would be tough and outside support would be needed to form the government.”
So, monitoring potential alliances of opposition parties is key. Modi’s performance in the eight state polls this year will also be a pointer for market sentiment, the analysts wrote. In December, the BJP held onto power in Modi’s home state of Gujarat with its lowest seat tally in about two decades.
The S&P BSE Sensex slid as much as 2.6% before recovering on Dec. 18 when votes were counted.
“State election results don’t suggest any material impact on BJP’s standing,” they wrote, noting that their calculation “is simplistic, as it does not consider differences in voting patterns for state and national elections.” Opinion polls for states going to elections this year may also receive market attention, more so if the possibility of holding early general election increases, the analysts say. (In 2004, BJP held the polls before its term ended and lost that election. The Sensex crashed as much as 17% when votes were counted May 17 that year.)
The rupee, already Asia’s second-worst performer, could also see a jump in volatility closer to event.
“With the election still 12 months away, only one thing is clear: uncertainty (either around the timing or party agenda),” the analysts wrote. “If portfolio flows slow due to election uncertainty or the recent rise in U.S. inflation (and yield), then the rupee could come under pressure.”
--With assistance from Ravil Shirodkar
First Published: Feb 27, 2018 15:44 IST