‘No matter who wins elections, market will fall’, predicts Bernstein

A recent research report by Bernstein states that a pre-election euphoria is building up in the market due to expectations of continuity of power of the current government, being legitimised through opinion polls, which are giving the NDA coalition as high as 411 seats. The average of these opinion polls signalled 385-390 seats for NDA, which has become the new base case.

The report apprehends that the media opinion polls may be hyped and the incumbent government, even though is likely to continue in power, may not be getting as many Lok Sabha seats as predicted in the opinion polls. A likely aftermath of the situation, as apprehended by the report is a correction in the market. The report states, "a correction is inevitable, and markets that are simply looking for a reason to fall may overreact to a sentiment that may not mean much rationally".

"With skyhigh expectations having set in, a number near to the 2019 value might trigger a short term negative reaction, but we believe a profit-booking post-elections is coming anyway, and the election results will only serve as a trigger point for the inevitable," says the Bernstein report.

The current opinion polls are predicting an average of 385 seats to the NDA coalition, which means continuity in government. The opinion polls by News 18-Nielsen predicts 411 seats for NDA, India TV – CNX predicts 393 seats, Zee News – Matrize predict 390 seats, Times Now – ETG says 386 seats, News X - Decoding says 380 seats and Dynamics ABP News - C Voter predicts 373 seats for the incumbent government in the coming elections.

Are opinion polls being overoptimistic?

While the opinion polls have predicted the current NDA government winning about 385 seats, the report questions the room for growth of these seats. BJP had won 303 seats in 2019 and NDA won 353 seats. To achieve the target of more than 400, as aimed by the current government, an additional 30 to 40 seats more than the previous elections will be required.

In the 2019 elections, the NDA won 144 seats out of 146 in Bihar, Delhi, Haryana, Himachal Pradesh, Madhya Pradesh, Gujarat, Rajasthan and Uttarakhand. In these states not only does the incumbent government not have any room for further growth, there may be loss of seats due to various issues. Currently, Gujarat faces a large Rajput agitation and anti-incumbency, Rajasthan is witnessing anger in various communities due to dissatisfaction from the Agniveer scheme, Delhi is agitated due to the arrest of the current Chief Minister, Haryana and Punjab are witnessing farmer protests, and Bihar is unpredictable due to the flip-flop loyalties of its sitting Chief Minister. The situation in Northeastern states of India too, does not look cosy because of Manipur.

Among southern states Kerala, Tamil Nadu, Andhra Pradesh and Telangana have a total of 101 seats where the NDA only won 5 in 2019. The opinion poll projections in these four states go as high as 33 seats for 2024, with the average at 26. In Karnataka, NDA had won 26 out of 28 seats in 2019 but the results of the last assembly elections and the incumbent state government implementing populist measures indicate a loss of seats for NDA, as compared to 2019.

In previous elections, NDA won 59 out of the 90 seats in West Bengal and Maharashtra. This time, the loss in Maharashtra is expected to be greater than the gain from Bengal. Even though the opinion polls, on average, give an edge of 5 seats combined in these two states, most (except Matrize) predict a loss of 8 seats in Maharashtra and a gain of 4 seats in WB. Uttar Pradesh and Odisha look to be the only sure-shot gainers, with NDA expected to gain 7-9 and 5-6 seats from these two states, respectively. The opinion polls show an average of 15 for the two states combined.

On the face of it, 300 seats will still mean the ruling party getting the absolute majority, and a construct similar to 2019, which is, in fact, a continuity of power as well as a continuity of extent of power. Still, it will be seen as a “below consensus” result, and a reaction cannot be denied. This can eventually start the end of the current market frenzy, which has lasted for a full year.

What happens if reality contradicts media polls?

The report points out that the current optimism and buoyancy in the market stems from the reaction to the opinion polls that have set the expectations of an NDA victory quite high. And even if there is a majority win for the NDA, it may not be enough to satiate the market expectations if the numbers, as predicted by the media, are not achieved. Even if the incumbent government manages to achieve the same numbers as the 2019 win, markets are likely to fall due to a short-term negative reaction. The report also believes that there will be profit-booking post-elections and the election results will only serve as a trigger point for the inevitable.

However, in the long-term, the macro story will take over and only modest downsides may be expected as the overall India story remains optimistic.