'Ground shock': What BJP seat wins above 290 or below 240 could mean for stock market

How many seats the incumbent BJP or the NDA alliance wins in the ongoing Lok Sabha elections could influence the stock market in days to come. In Bernstein words, BJP winning over 290 seats would boost 'Mission: India 2047'; the incumbent winning 260-290 seats would rein in capex drive; a 240-260 seat wins for BJP would be a 'ground shock' while less than 240 seat wins (with NDA less than 270 seats) would trigger the return of populism. (Table below)

Bernstein said The India growth story, which has been expanding from strength to strength, would not fizzle out. It took some steps forward in the “India Shining” phase till 2004 and made great strides in the “Bharat Buland” (Lofty India) period till 2009, even as it faltered somewhat in scandals and stagflation during the taper tantrum, Bernstein said. 

From 2014, it noted, India started taking a giant leap with large-scale reforms that came at a rapid pace, partly also being helped by the ruling party getting a majority unforeseen for three decades.

"This reason, coupled with the performance on fiscal parameters, keeping inflation under check, a better track record on capex and a sustained manufacturing push, is why the markets will react positively to continuity of power and can trigger a short-term correction in case the results for ruling party are significantly down from expectations.

In case, the PM Modi-led BJP wins 260-290 seats, there could be mild profit booking in the stock market in near term. High single-digit market returns for this year likely, Bernstein said. If BJP wins 240-260 seats, there would be moderate to heavy profit booking near term. High single digit market returns for this year are still likely, it said. Meanwhile, if BJP wins less than 240 seats, there would be a return of populism and heavy profit booking near term. In such a scenario, low or negligible returns for markets this year is likely, Bernstein said.

Bernstein sees a higher probability of around 330-350 seats for NDA, which is more of a scenario between case1 and case 2  driving some rally in the markets post-election results (or heading into it). It sees a short-term breach of 23,000 on Nifty, but sees a swift profit booking brings it back below that level.

Bernstein said the 100-day agenda of the government and expectations from the Budget are other events that could play out as support catalysts. It thus expects some near-term buoyancy in the equity markets. 

"While the risks emerge on case 3/4 playing out - we see it as a low probability outcome. Continuity of power was known to equity markets, which is why we had a rally in Nov/Dec last year - playing again and again on the same theme leads to absurd outcomes for valuations - hence, we believe the focus will eventually return to macro, earnings growth, reasonability of valuations etc," Bernstein said.The over analysis-based self-induced stress the markets have seen over the past month is the only reason for the relief rally Bernstein is calling for. 

Bernstein said this year's returns would likely stay at high single digits, with a possibility to remain low only in case of a frantic policy shift that can come with a change in government.

"For the broader macro, the reforms undertaken mean that India has outgrown the phase where it will likely depend on political continuity to deliver high growth, as the multi-year cycle that has begun is unlikely to be impacted significantly due to minor policy changes. The shifting focus, however, can impact the long term growth/views on sectors and external front - like exports and balance of payments," it said.