The key risk factors would be anti-incumbency, small vote share swings causing large impact on outcomes and the 2004 example.

Political continuity is the most likely outcome of the upcoming general elections in May 2024, predict analysts at Jefferies in a recent note, and attach a 70 per cent probability (base-case for the markets) that Narendra D Modi-led Bharatiya Janata Party will form a majority government.

Given this, they expect property and capex-related plays including cement, infrastructure and capital goods, large banks and small-and midcaps (SMID) to do well.

However, the key risk factors, Jefferies said, would be anti-incumbency, small vote share swings causing large impact on outcomes and the 2004 example.

Potential market volatility ahead of the elections should be used to add domestic cyclicals.

The political calendar will get busy in the next few months as five states Madhya Pradesh, Rajasthan, Chhattisgarh, Telangana and Mizoram go to the polls, which experts suggest will be seen as an indicator of the BJP’s performance in 2024.

In 2018, the BJP lost power in MP, Rajasthan and Chhattisgarh to the Congress and the results came as a negative surprise.

‘Political continuity is the most likely outcome, though the margin of victory could be narrower. We, therefore, are overweight on capex recovery plays including banks, industrial and property. Our top picks are Axis Bank, ICICI Bank, SBI, L&T, Ultratech and property and select industrial mid-caps including Thermax, KEI Industries, Siemens and Kajaria. We are also tactically overweight staples running up to the elections in the expectations of favourable rural policies,’ wrote Mahesh Nandurkar, managing director, Jefferies, in a recent note co-authored with Abhinav Sinha and Nishant Poddar.

Out of the last four national elections, the previous two elections results were more on the expected lines, yet the Indian market outperformed MSCI AxJ during the election results period (10 days including results impact) by 5-9 percentage points (ppts).

An analysis of the past four general elections in 2004, 2009, 2014 and 2019 suggests that the equity markets slowly begin to price in the expected election results over a period of six months prior to the actual election date.

Equity markets, Nandurkar said, like a stable government headed by a leader with a strong development/reform agenda.

‘In the previous 6 months leading up to the election week, India outperformed before 2014 elections, but performed in line for 2019 elections. We note that in December 2018 (4-5 months before the 2019 national elections), BJP had lost three key state elections in the state of MP, Rajasthan and Chhattisgarh, yet won the final national election in style,’ the note said.

Jefferies attaches a 20 per cent probability to the event that the BJP will fall 20-30 seats short of the majority mark, but will form the government with the support of its allies.

In such a scenario, it expects a hint of populism, but expects the government’s priorities to largely remain on track.

Property, select capex plays including Larsen & Toubro, cement, and discretionary consumption are the themes to bet on in such a scenario, the Jefferies note said.

It attaches a 10 per cent probability to INDIA — the Opposition alliance — forming a weak and populist government.

Investor sentiment, it cautioned, will take a hit and sees over 10 per cent fall in the markets in this backdrop.

‘Staples, information technology, pharma, domestic cyclicals can be bought after the initial fall,’ Nandurkar suggests.

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