How will stock markets react to Lok Sabha elections? ‘Correction inevitable’

Bernstein said that a pre-election euphoria is building up as the BJP coalition could possibly win over 400 seats.

The Indian stock market may witness see profit-booking after the Lok Sabha elections as the results will be the trigger, brokerage firm Bernstein said. It also added that a pre-election euphoria is building up as the BJP coalition could possibly win over 400 seats. Bernstein analysts Venugopal Garre and Nikhil Arela in a report noted, “With sky-high expectations having set in, a number near to the 2019 value might trigger a short-term negative reaction, but we believe a profit-booking post-elections is coming anyway, and the election results will only serve as a trigger point for the inevitable."

A bird flies past a screen displaying the Sensex results on the facade of the Bombay Stock Exchange (BSE) building in Mumbai. (Reuters)

The analysts said that eventually the macro story will take over and as it stays healthy, there could be expect modest downsides while manufacturing and capex stories will remain a key theme. The brokerage firm noted that polls project as high as 411 seats for the ruling National Democratic Alliance (NDA).

“A correction is inevitable, and markets that are simply looking for a reason to fall may overreact to a sentiment that may not mean much rationally. On the face of it, 300 seats will still mean the ruling party getting the absolute majority, and a construct similar to 2019, which is, in fact, a continuity of power as well as a continuity of extent of power. Still, it will be seen as a “below consensus" result, and a reaction cannot be denied," the analysts said.

This can eventually start the end of the current market frenzy that has lasted for a full year, the firm added.