The tranquility in India’s $3.7 trillion stock market is set to be broken as the world’s most populous nation heads to polls in about six months, according to Morgan Stanley.
While the Wall Street bank expects stocks to rise leading to the vote in keeping with recent history, any outcome outside of investors’ expectations could spark a slump of as much as 30% in India’s equity benchmarks.
A “credible seat-sharing arrangement” within the opposition alliance led by the Indian National Congress, called I.N.D.I.A, will “polarize the general elections and reduce the predictability of the outcome in May,” strategist including Ridham Desai wrote in a note Monday.
7% rise in the Indian stocks
Indian stocks have risen about 7% this year, outpacing their peers in Asia and emerging markets, as growth in earnings and the economy lured local and global investors. India VIX, a gauge of expected stock-price swings, has slumped 25% so far this year to near its historical low.
“A potential change in government could lead to changes in the direction of policy reform and execution leading to poor investment sentiment,” Morgan Stanley said.
Still, the brokerage sees India’s S&P BSE Sensex rising 14% next year in its base case, which assumes a majority government formed by Prime Minister Narendra Modi’s Bharatiya Janata Party.