'Markets are not going to be calm about elections'

Coalition governments aren’t necessarily a negative for the economy, though they can result in negative outcomes in the stock market if not already priced in before elections.

Illustration: Uttam Ghosh/Rediff.com

Foreign brokerage house Morgan Stanley set up shop in India 25 years ago, in a decade when coalition governments ruled the roost at the Centre.

This is not something investors are expecting after the 2019 Lok Sabha elections, at least not yet - though volatility is likely to rise as polls draw near.

“The markets are not going to be calm about elections. They are going to be all over the place,” said Ridham Desai, head of India research and equity strategist at Morgan Stanley India Company.

He was speaking at an event to mark the organisation’s silver jubilee in India.

The markets has not yet priced in a fragmented coalition result, according to him, which may result in significant volatility if this turns out to be the case.

“My judgement is that the market has still not priced in (the) election’s possible outcome.

"I feel that it will start doing that in the first week of December.

"Market participants, I think, believe that the state poll results would give them some perspective about the general election results,” he said.

He said that December 11 would be a key date in setting market expectations.

The day will see counting commence for the state elections which precede the one at the Centre.

“That’s when we will know what the market is believing about 2019 – whether it’s going to be a single-party government or a coalition government,” he said.

He added that state elections aren’t necessarily the best indicator of the government at the national level.

He also added that coalition governments aren’t necessarily a negative for the economy, though they can result in negative outcomes in the stock market if not already priced in before elections.

This has been seen in previous cycles, too, he said, when elections resulted in large coalition governments.

Markets hardly reacted because this was already expected.

Meanwhile, flows to the equity markets are expected to continue over the longer term.

Domestic investors are likely to increase their equity allocations, leading to higher multiples for Indian stocks, according to an October 29 India Economics and Equity Strategy report authored by Desai, equity strategist Sheela Rathi and economist Upasana Chachra.

“In turn, this means nominal equity returns in rupees could be lower than the trailing performance in the coming decade, albeit with lower volatility,” it said.

Morgan Stanley expects the market capitalisation to grow slightly slower than the last 25 years.

It believes that growth will be at the rate of 12 per cent over the next decade compared to 14 per cent earlier.

This would still result in a market capitalisation of $6 trillion over the next decade, according to the brokerage.

It was $90 billion when Morgan Stanley set up shop in India.