Market correction inevitable as NDA’s 400-seat mission less likely to transpire, says Bernstein

Despite the correction, manufacturing and capex will remain a key theme, irrespective of the seats garnered, Bernstein added

As polling for the largest election in history kicks off, international brokerage Bernstein said that the domestic equity markets could see profit-booking following the results, as the election will only serve as a trigger point for a correction.

The expectations of the incumbent government retaining power are high, therefore leading market participants to believe the elections will be a “non-event”. The opinion polls are predicting a massive surge in the number of seats the NDA will win, with estimates between 385-390. This figure has become the new base case.

The markets began the current calendar year at record valuations, particularly in the small and mid-cap space. However, there was a minor correction in February and March, but the SMIDs have resumed their upwards momentum. Bernstein attributed this to a pre-election rally, “augmented by the ruling party coalition possibly winning over 400 seats”.

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However, if the NDA wins around 350 seats, when markets have factored in a number close to almost 400, a correction will be inevitable. “Markets that are simply looking for a reason to fall may overreact to a sentiment that may not mean much rationally,” said Bernstein.

The brokerage added that there are higher chances of the NDA seeing a minor gain, “with lower probabilities of deviating significantly above and below its 2019 tally of 350”. The seats that the NDA might gain in states where it has a lower penetration may not exceed the number of seats the coalition might lose in other states, said Bernstein.

350 seats will mean the party still rules with an absolute majority. However, the poll result will be seen as a “below consensus” result, to which the markets will react. “This can eventually start the end of the current market frenzy, which has lasted for a full year,” said the brokerage.

However, despite the correction, manufacturing and capex will remain a key theme, irrespective of the seats garnered. The focus on manufacturing will continue, which will help improve the unemployment situation in the country, it added,

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