Election cycle uncertainty ahead! Morgan Stanley lists 6 major ‘risks and catalysts’ for Indian equities

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Updated: Jul 16, 2018 1:47 PM

As the run-up to 2019 Lok Sabha elections has already begun with about 10 months left for the poll, the global investment bank Morgan Stanley has said that election cycle uncertainty will act against Indian stock markets.

Household demand for stocks remains strong, although supply is also rising, Morgan Stanley said. (Image: Reuters)

As the run-up to the world’s biggest democratic elections — 2019 Lok Sabha elections — has already begun with nearly 10 months left for India going to poll, the global investment bank Morgan Stanley has said that election cycle uncertainty will act against Indian stock markets. “As we approach the 2019 general elections, the market is likely to shift focus on likely outcomes as a key driver for performance,” Morgan Stanley said in a report. Commenting on the present situation of domestic equities, Morgan Stanely said that “Indian stocks are jostling weak emerging markets, rising rates, higher oil prices, an election year and relatively rich mid-cap valuations”.

Going ahead, factors such as rich mid-cap valuations, increasing crude oil prices, rising equity supply, upward pressure on inflation and global stock market performance will weigh on Indian stock markets, Morgan Stanley report said. However, improvement in the growth cycle, strong macro stability and local appetite for equities will support large-cap index, the report said. Other than election year uncertainty, Morgan Stanley has listed 5 ‘risks and catalysts’ with regard to Indian equities.

Morgan Stanley’s major ‘risks and catalyst’ for Indian equities

Earnings growth: The corporate earnings are the biggest reason in driving the stock prices as it is the most fundamental and basic underlying factor as far as the stocks are concerned. Morgan Stanley has said that “market is already anticipating some turn in the growth cycle and hence a feeble improvement will not help stocks”.

Lending rates: Following the rising pressure on inflation on the back of increasing food prices is likely to create a chance for more rates hikes. “We need to bear in mind that the RBI now has an explicit mandate to keep inflation under the lid (unlike the past, when its mandate oscillated between growth and inflation). At the minimum, there is likely to be more volatility in stocks as the rate cycle inflects upward. We see a couple of more rate hikes this year with oil and food prices representing a risk to the upside for rates,” Morgan Stanley report said. Today only, Inflation based on wholesale prices shot up to 5.77% in June on increasing prices of vegetables and fuel items from 4.43% in May 2018 and 0.90% in June last year.

Global stock markets: Indian share market performance has been by and large affected by the ongoing sentiments across global markets in the past but going ahead the picture may be different. Morgan Stanley has pointed out that India’s beta to the world has dropped to a 13-year low which possibly sets the stage for India’s outperformance in a low-return world.

Crude oil prices: As India is a major importer of crude oil (third-largest crude importer in the world), the nation’s trade deficit is highly affected due to the fluctuation in crude oil prices. Earlier last week only, India’s trade deficit ballooned to a five-year high following the sharp rise in crude oil prices as crude oil import bill in June rose 57% YoY to $12.73 billion. Morgan Stanley has said that crude oil remains a key risk to equities given its ability to cause pain to the fiscal deficit and, therefore, growth.

Net demand-supply: “Household demand for stocks remains strong, although supply is also rising. There is an active debate on the sustainability of domestic flows, and the monthly number will be widely tracked,” Morgan Stanley report said.

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