BJP loses the states game, should investors be worried about 2019?

New Delhi: Prime Minister Narendra Modi, BJP President Amit Shah and other leaders during the party's Central Election Committee meeting for the Assembly polls in Telangana, at party headquarters in New Delhi, Thursday, Nov 1, 2018. (PTI Photo/Vijay Verma) (PTI11_1_2018_000241B)

The high voltage drama that unfolded on the political front on December 11 made one thing clear — that it will be an uphill task for BJP to win majority in 2019 general elections and investors will have to tread with caution.

Many first-time investors who jumped in the equity pool when BJP took control at the Center in 2014 are in for a bumpy ride, if not tough.

With the 0-3 outcome in the state polls against BJP, the party is clearly on the back foot now. Most experts feel that the government will now be pushed to rollout populist measures, to regain the trust of voters, thus putting pressure on fiscal.

However, anecdotal evidence from the past Assembly and Lok Sabha elections indicates that it is not necessary that a loss in Assembly Election means weak performance in Lok Sabha elections (as seen during 2003 assembly/2004 Lok Sabha elections).

Elara Capital conducted a ground research in 250 villages across India, which suggests that people vote differently in state and national elections. Given these two factors, the governments might have a reason to stick to fiscal glide path and not succumb to pressure due to state election losses, in our view.

The report further added that the strength of the government (absolute majority versus coalition) or growth/populist political orientation has no implication on economic growth or the stock market.

Given the existing global macro headwinds such as trade war escalation, slowing global growth, US recession concerns and worries over RBI autonomy, Elara Capital expects enhanced volatility environment to persist and have a negative bias towards market performance in the near term.

While the losses for BJP will rob it of some momentum, it is perilous to extrapolate state election results to central government elections. Experts suggest that state elections very often are fought on local issues, and the outcome will be different when it comes to the national level.

If we look at the actual results, the winning margin for Congress in two of the three Hindi heartland states — Madhya Pradesh and Rajasthan — is quite narrow. Hence, we can’t conclude that the brand Modi is fading.

“At the central level, Prime Minister Modi maintains overwhelming popularity over his competitors, and anecdotal evidence suggests BJP has more boots on the ground than other parties to mobilise during its re-election campaign,” said a Nomura report.

“However, we do expect talks of a grand coalition to raise political uncertainty going into the 2019 general elections (scheduled in Q2),” it said.

Political uncertainty will be one of the key factors to watch out for and that could hurt domestic flows, which supported the market in 2017 and 2018 when FIIs pulled out funds.

CLSA in a note said that domestic retail investors started to come into equity markets in a meaningful way starting May 2014 and this coincided with the win for Modi and expectations of a stable development-oriented government.

“State election results will increase fears of an unstable government among retail investors and this could impact market inflows. A slowdown in flows could impact market multiples,” it said.

Another global brokerage firm, UBS said in a note that BJP coming back in 2019 is being priced in, and the market is evaluating various outcome possibilities. The market risk-reward remains unattractive as it continues to trade expensively.

Strategy for 2019:

Most experts feel that investors should focus more on largecaps and select mid & smallcaps, but for wealth creation, allocate majority of your portfolio towards equities.

“In the coming months, general elections remain an overhang. We believe that the formation of a business-friendly government would help drive the next rally in equities. Our target for Nifty for December 2019 is 14,000,” Rajiv Ranjan Singh, CEO - Karvy Stock Broking told Moneycontrol.

“We expect H2 of CY2019 to be good for equities and believe investors should be overweight equities, especially stocks that are geared to an economic recovery,” he said.

He further added that while the asset allocation depends on a number of factors like age and risk tolerance. On an average, one could allocate 70% to equities, 20% to fixed income, 5% to gold and 5% to cash.

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