Lok Sabha polls: UBS predicts impact on stock market in various scenarios

UBS has come up with four different scenerios of the election results and its impact on the share market. In a scenerio in which Prime Minister Narendra Modi led BJP retains absolute majority the stock market indices Sensex and Nifty are likely to scale new highs. As per UBS the probability for this is high. Meanwhile, it suggests that the stock market valuations may get derated and a test of pre-NDA valuation multiples are likely if INDIA bloc comes to power.

New heights or devalution?

As per UBS, alliances have historically played crucial role in Indian elections. But the BJP’s dominance as a single party in the previous two elections has somewhat diminished the influence of coalitions in government formation. 

"In the 2019 general elections, the BJP achieved a voter share above 50% in 222 out of the 303 seats won, with the margin of victory above 5% in 259 seats (over 85% of total seats won). The opinion polls show the newly formed coalition, INDIA (Indian National Developmental Inclusive Alliance), may struggle to gain voter share as BJP's dominance seems to be continuing in the 2024 elections as well," it said.

UBS further said that any market underperformance triggered by election results, historically, tends to reverse in the medium to long term, as investors and businesses adapt to new government policies.

"Despite the potential for near-term election-driven uncertainty, we reiterate our view that any sharp weakness in equities could offer buying opportunities," it said

Here are the four scenerios and the impact, as per BJP:

• If BJP will retain single-party majority as in opinion polls, markets will likely remain confident about policy continuity, but the likelihood of further reforms including on disinvestment, the land bill, and the uniform civil code could depend on the number of seats won. Overall, it believes the financial market sentiment will likely remain positive
• If BJP fails to retain single party majority, but NDA forms government markets could be slightly less confident about policy stability as fiscal consolidation could be slower than envisaged. There could be pressure from other political alliances, but overall macro stability could still persist and could see a mixed impact on financial markets
• In case of a Hung parliament as NDA fails to get the majority, UBS said it could lead to lags in implementing reforms. It envisages risks of policy paralysis, which could negatively impact financial markets
• If INDIA bloc gets the majority there could be significant market uncertainty with the potential for more abrupt policy changes. "We see high risks of reversal of some reforms implemented by the NDA. Financial markets could potentially see a sharp knee-jerk reaction due the uncertainty that comes along with a change in government", UBS said

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