Sensex could crash by 40% if BJP loses 2024 elections
Morgan Stanley has forecasted that Indian frontline indices S&P BSE Sensex and Nifty50 could rise up to 10% in the run-up to the general elections in April 2024. The report suggests that investors are anticipating continuity and a majority for the incumbent government. However, it also warns of potential volatility following the elections, with swings between 5% and -40%, depending on the outcome.
The report lists four possible outcomes
The Morgan Stanley report outlines four possible outcomes for the 2024 Lok Sabha elections. Outcome 1: Incumbent government wins over 260 seats or an absolute majority. This could result in a gain of up to 5% in the benchmark indices. Outcome 2: Incumbent party leads with less than 240 seats, but forms a coalition government. This could potentially cause a 5-7% drop in benchmark indices.
Bearish case scenarios
Outcome 3: Lead party with approximately 225+ seats with a turnover in government, but the incoming anchor party has a good position in the house. This could lead to an immediate sharp correction of up to 20-25%. Outcome 4: In a worst-case scenario, the incumbent party loses, and the lead party, with less than 200 seats, forms a weak coalition where they play a supporting role only. The report forecasts a 33% reduction in the index under these circumstances.
Weak coalition threatens economic growth
Morgan Stanley's report emphasizes that a weak coalition government will lead to lower predictability of growth, and the pace of execution could also be at risk. The report predicts that even though the absolute level of growth may not be at risk, the weak coalition government could compromise economic policy. The report also recalls the 2004 elections, when the Sensex fell 17% in a single trading session due to unexpected election results.
Morgan Stanley's sector recommendations by outcome
If Outcome 1 occurs, Morgan Stanley recommends investors remain 'Overweight' on consumer discretionary, financials, industrials, and Infotech while staying 'underweight' on consumer staples, energy, healthcare, materials, communication services, and utilities. In the worst-case scenario, Outcome 4, the brokerage advises being 'Overweight' on energy, consumer staples, healthcare, utilities, communication services, materials, and infotech. It is also to be noted that five state elections are taking place in the coming months: Mizoram, Telangana, Rajasthan, Madhya Pradesh, and Chattisgarh.
