Bulls And Bears Case: How 5 States Exit Polls Ahead Of General Elections Will Set Stage For Sensex In 2024?

India is currently focused on five states namely Madhya Pradesh, Rajasthan, Telangana, Chhattisgarh and Mizoram whose assembly elections outcome will be announced on December 3rd. Wins in these states' elections will be crucial for general elections that will be held in 2024. And accordingly, it will further set a stage for movement in the Indian market, especially the Sensex. If the current government reigns once again, then Sensex is expected to hit 74,000 levels as a base case by December 2024-end.

At best, the bull case scenario would be for Sensex a staggering 86,000 mark. However, if the elections deliver a change in government, chances are that this benchmark will be toppled heavily next year as a bear case.

Currently, exit polls of these states are being observed. At the moment, the Congress party is aiming to retain its power in Rajasthan and Chhattisgarh, while BJP is aiming for another term in Madhya Pradesh. While the two large parties have been big contenders for many years in these states, they both together face challenges for victory in Telangana and Mizoram. Both Congress and BJP are looking to topple Telangana's current government Bharat Rashtra Samithi which is led by K Chandrashekar Rao, while in Mizoram the latest ruling party Mizo National Front is competing against Congress and Zoram People's Movement.

Notably, polls in these five states have seen participation from 8.2 crore male and 7.8 crore female voters out of which 60.2 lakh people are first-time voters.

Generally, an exit poll gives an idea of the outcome of an elections in states. While assembly elections involve voting from every citizen of India in only their constituency. Candidates who win the State Legislative Assemblies elections become the 'Member of Legislative Assembly (MLA) who then hold their respective positions for a tenure of 5 years or until their ruling party is dissolved.

How will elections impact Sensex in 2024?

As per the latest research note of Morgan Stanley, in the short run, the state election results in December for five states could create volatility, especially if the BJP loses a majority of those states. Key to watch in 2024 general elections is if the opposition alliance, called I.N.D.I.A., can put up a credible seat-sharing arrangement, which polarizes the general elections and reduces the predictability of the outcome in May next year.

In our base case, Morgan's note said, "We expect the market to trade higher in the run-up to the 2024 polls." It added, "..elections have the propensity to create extreme outcomes for the stock market. Historically, the market has favoured continuity and a majority government, as this implies limited policy shifts post elections. In the event, if the results go against the market's preferred outcome, we see the possibility for a draw down of 30%."

Morgan gives a base case scenario for markets in 2024 due to elections. According to the American multinational investment bank and financial services company, Indian equities are likely to rise into the 2024 general elections, as the market is likely to price in continuity and a majority government.

For the current government's continuity, Morgan's note highlighted key fundamentals. These are -- 1) strong macro stability as a result of improving terms of trade, flexible inflation targeting and stable non-portfolio foreign flows; 2) forecast earnings growth of about 20% annually over the next four to five years, led by an emerging private capex cycle, re-leveraging of corporate balance sheets and unfolding of a structural rise in discretionary consumption; and 3) a reliable source of domestic risk capital.

Morgan said, "These factors have reduced correlations and volatility of Indian stocks relative to EM. India's beta to EM is

BASE CASE:

Hence, Morgan expects the Sensex to hit 74,000 levels as a base case by the end of December 2024. This level suggests that the BSE Sensex will trade at a trailing P/E multiple of 24.7x, ahead of the 25-year average of 20x. The premium over the historical average reflects greater confidence in the medium-term growth cycle in India.

Morgan's note said, " In our base case, we assume continuity in a government with a majority mandate resulting in stable policy, the RBI executes a calibrated exit from its current hold stance, robust domestic growth, the US does not slip into a protracted recession and benign oil prices. We forecast BSE Sensex earnings to compound 21.5% annually through F2026E. However, the base case masks the potential for volatility in 2024, which is evident in the spread of our bull-bear scenarios."

Historically, the Indian market has favoured continuity and a majority government, as this implies limited policy shifts post elections.

BULLS CASE:

The probability of a bull case is 30% by Morgan Stanley on Sensex. The brokerage expects Sensex to at max rise to the 86,000 mark by the end of December 2024-end. It said, "In addition to the above, oil prices dip into the US$70s or below resulting in lower domestic inflation and deeper rate cuts from the RBI, the US growth cycle renews with global share prices responding with a strong up move and bond flows surprise to the upside. Earnings growth compounds 24% annually over F2023-26E."

BEAR CASE:

One cannot rule out the chances of a bear case in Sensex as well. The probability of a bearish tone in Sensex is 20%, which as per Morgan could take the benchmark to 51,000 levels. According to the brokerage, : India's elections deliver an unclear mandate with a change in government, oil prices surge past US$110/barrel, the RBI ends up tightening to protect macro stability and a US recession leads global growth lower. Sensex earnings compound 15.5% annually over F2023-25E with meaningfully slower growth in F2025 and equity multiples de-rate to reflect poor macro conditions.

On the portfolio strategy, Morgan's note said, Cyclicals > Defensives, Large-caps > SMID. OW Financials, Consumer Discretionary, Industrials & Technology and UW other sectors. While it expects the macro trade to peak in 2024.

Additionally, JM Financial said, " Market participants have factored in policy continuity in the upcoming general elections in 2024. Investors are largely finding comfort in the domestic consumption-led stories while remaining cautious on the sectors exposed to the global environment."

This week, the BSE market cap crossed the $4 trillion mark, which as per Satish Menon, Executive Director of Geojit Financial Services, signals the start of a fresh momentum in the stock market. He added, "The Indian stock market is rallying due to solid Q2 earnings and a drop in crude oil prices. Domestic liquidity has provided support to the market, but the lack of foreign fund inflows due to high US bond yields has been a hindrance. Fortunately, interest rates in the US have peaked, and the dollar index is declining, which is expected to attract foreign institutional investors (FIIs) into the Indian equity market. The consistent decline in the Consumer Price Index over the past four months has also sent out a positive signal to the market."

Despite the strong fundamentals, Menon expects a few hiccups in the market due to the assembly elections, however, in the long run, they are well-poised for upside. He said, "There may be some volatility in the market leading up to the state election results which are due on December 3. Having said that, we can definitely say that India's growth story remains intact, and the market will be on an upward trajectory going ahead."

So far in 2023, Sensex has rallied by 6,319.32 points or 10.33%, and Nifty 50 zoomed by 2,072.90 points or 11.39%. On December 1st, just ahead of the assembly elections outcomes, Nifty 50 hit new all-time high of 20,286.30. Earlier, in September, Sensex touched its historic high of 67927.23.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.