2024 elections: Morgan Stanley's stock portfolio for 4 different scenarios

Foreign brokerage Morgan Stanley said the domestic market has the potential to swing between 5 per cent and minus 40 per cent in three months post 2024 general elections. While expecting the stock market to be pricing in a result that favours continuity of incumbent NDA with a majority, Morgan Stanley sees about 10 per cent rise in Sensex and Nifty by May 2024 in the runup to elections. Post elections, however, the short-term trend would depend on the outcome, it said.

In the first scenario, where the incumbent comes up with 260-plus seat, Morgan Stanley sees a further 5 per cent upside for Sensex in three months post elections. Morgan Stanley said this is what is likely to be priced in. It could change if the opposition demonstrates a strong coalition by early next year, Morgan Stanley said.

In the scenario 2, Morgan Stanley expects the lead party, NDA, to get less than 240 seats. This would mean the incumbent falls short but still forms a government with its allies. Morgan Stanley said this is less than ideal for the stock market, resulting in 5-7 per cent drawdown for benchmark indices.  The market, in this case, could be concerned about the compromises that need to be made on economic policy to make a coalition government work.

In scenario 3, Morgan Stanley sees lead party getting less than 225+ seats.

"The market may ultimately settle higher but it immediately experiences a sharp 20 per cent correction in this scenario. The market's concern will be around policy stability and choices and it could also be concerned about foreign sentiment and flows," Morgan Stanley said.

In the last scenario, Morgan Stanley sees a weak coalition with participation of a lead party only in a supporting role with less than 200 seats.

"This is likely the market's worst-case scenario; we assume a third is shaved from the index. In a weak coalition the predictability of growth and inflation tends to fall notably, even though the absolute level of growth may not be at risk. The pace of execution could also be at risk," it said.

Stock portfolio

In the fourth scenario, the market would price in poor growth and  the portfolio becomes defensive, Morgan Stanley said. "In between these scenarios, the portfolios gradually lose their cyclical nature and become defensive," it said adding that the average portfolio is skewed toward cyclical exposure with a barbell in the form of an overweight (OW) in technology, which is consistent with Morgan Stanley's current portfolio positioning.

 

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