Markets expecting BJP to form next govt: UBS

UBS Securities India says markets are likely pricing in the Bharatiya Janata Party (BJP) to retain the single-party majority as the most likely outcome.

"If the election plays out as expected, we anticipate policy continuity, macroeconomic stability, and the potential for further structural reforms, all of which could positively influence Indian financial markets," Premal Kamdar, Head CIO Equities India, UBS Wealth Management, writes in a report.

Any unexpected outcome will likely be perceived negatively at least at first, due to political instability and possible policy paralysis weighing on business sentiment and impacting investor confidence, Kamdar says.

This, according to UBS, could trigger knee-jerk reactions in financial markets in the near term, with equity valuations possibly testing pre-NDA (National Democratic Alliance) levels.

The foreign brokerage says a strong BJP mandate would imply increased focus on infrastructure spending that would be beneficial for infrastructure-linked sectors such as industrials, capital goods, utilities, defence, cement, and real estate.

On the flip side, a weaker BJP mandate may lead to more spending on consumption and lower-income households, which broader markets may not like, though it could help consumption-led sectors perform relatively well, the report says.

The opinion polls before elections suggested further seat gains for the BJP party. However, the actual progress in the first five phases of the election has been less clear, says UBS. The lower voter participation so far and possible loss of some voter share in key states like Maharashtra, West Bengal, Karnataka, and Bihar due to regional political uncertainty have raised questions about the NDA's ability to secure a third term, the report says.

If the BJP fails to retain its single majority, but forms a government with the NDA with a majority, markets could be slightly less confident about policy stability as fiscal consolidation could be slower than envisaged, says UBS. “There could be pressure from other political alliances, but overall macro stability could still persist. We could see a mixed impact on financial markets,” it says.

In case of a hung parliament, there could be higher market uncertainty with the potential for prolonged political negotiations, according to UBS. “A less decisive government could lead to lags in implementing reforms. We envisage risks of policy paralysis, which could negatively impact financial markets,” the brokerage says.

While the intensity of the impact on financial markets could vary depending on the election outcome, past instances suggest the significance of election results diminishes over the medium to long term, says UBS.

“Market underperformance tends to reverse as both investors and businesses adapt to new government policies. So, we reiterate our view that significant weakness in equities could offer buy-on-dip opportunities. Within fixed income, we believe medium- to long-duration bonds are in a sweet spot and could become even more attractive if bond yields spike in certain election outcomes,” the report says.