According to Morgan Stanley, Indian market's move relative to emerging markets will continue to occur before the elections rather than after it unless there is a material positive surprise in the outcome
The world is about to witness the biggest election in history, which could herald a sea change for India’s economy that has struggled with stagflationary-type conditions over the past few years. "We believe that the outcome of the general elections will be key in determining the pace of reforms. A strong and stable government could accelerate this process, leading to a sustainable improvement in gross domestic product (GDP) growth," says Morgan Stanley in a research note.
According to the report, Indian equity market is pricing in a decisive election outcome and the beginning of a new growth cycle in its aftermath. It said, "India’s current market rally is in line with emerging market (EM) countries’ historical trend of pre-election performance, based on our study of 25 major EM elections since 2000. This has caused the market to be overbought within EM on our key technical measures. Yet, MSCI India’s 1-year forward P/E relative to MSCI EM is currently at a 42% premium, slightly above its 10-year historical average".
The pre-poll surveys are suggesting that India's next government will likely be a narrow Bharatiya Janata Party (BJP) coalition, with the National Democratic Alliance (NDA) winning 230-240 seats headed by the party's Prime Ministerial candidate Narendra Modi.
According to Morgan Stanley, external funding and bank reforms are key for the Indian credit view. "If the election produced a strong political majority, we think credit spreads would likely tighten on the potential for improving BoP, SOE bank recapitalization and a more stable sovereign ratings outlook. From the currency market’s standpoint, the post-election reaction in Indian rupee would come from the impact on the capital account, where foreigners’ flows in equities would be the dominant driver for the currency," it added.
If the election result is decisive, utilities, SOE banks, energy, industrials and materials could gain the most.
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