Are Morgan Stanley And Chris Wood Right In Predicting A Strong Fall In Markets If 'INDIA' Wins In 2024? 

With the 2024 Lok Sabha elections just six months away, the market for projections is all set to thrive in the coming days. One such prediction by none other than investment behemoth Morgan Stanley and popular market strategist Chris Wood has piqued the interest of investors. As per them, if the INDIA bloc consisting of 26 parties is able to upset the Narendra Modi government in the next election, stock markets are going to see a sharp fall. 

Chris Wood, speaking at a media conclave, did not mince his words and warned, “If there was a repeat of what happened with the surprise election in 2004, then I would expect a 25 percent correction if not more.” For the unversed, Congress-led UPA had managed to topple Atal Bihari Vajpayee’s NDA government in the 2004 election. The result had come as a surprise as most of the pollsters had predicted a smooth victory for the Vajpayee government.  

While predicting elections is a difficult game in a country like India, most of the analysts are predicting a return of PM Modi-led NDA government. Morgan Stanley has set its base scenario with the expectation of NDA’s win. However, the firm has warned, “A potential change in government could lead to changes in the direction of policy reform and execution leading to poor investment sentiment.” The strategic note has also warned that a “credible seat sharing arrangement” within the INDIA bloc can reduce predictability of the election. In one of the scenarios, the investment bank has predicted a 30 per cent fall in markets! 

These predictions have garnered attention, and many have wondered whether such a scenario can indeed play out. Predicting how the market would be affected due to elections or how the election will pan out is best left to experts. However, the data for the last few elections and their effect on markets tells an interesting story.  

How Elections Move Markets 

Analysis of the one-month and six-month phase of markets after elections shows that volatility in the market depends on the expectation of the outcome. For example, the markets had expected the Vajpayee government to return. However, the Congress-led UPA sprung a surprise and managed to form the government. The markets reacted sharply and fell over 12 per cent within one month.  

But a change in government in 2014 did not lead to such a correction. Most pollsters and analysts had predicted a comfortable victory for Narendra Modi-led NDA at the time. There is an important thing to note. Despite a sharp correction within the first month of the shock result in 2004, the markets quickly bounced back and posted positive returns in six months' time. The story was the same for all of the elections held in the 21st century.  

This phenomenon could be the reason why Woods said along with his prediction of stark correction, “But the markets would bounce back sharply due to the momentum." 

Market analysts also share the same opinion as the investment bank and Wood, INDIA bloc’s upset would trigger a fall in the markets. Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, opines, “Markets like stability and, therefore, the market’s preference would be the continuation of the BJP regime. But if the INDIA alliance succeeds in toppling the NDA, there will be a sharp correction in the market.” 

Brokerage firm Prabhudas Lilladher had warned investors in a note that 2024 elections remain a key risk. It added, “We believe stable govrnment post elections and continuation of economic policies can take markets to new heights.” 

The conventional wisdom it appears is that predictability and continuity are the two factors which is important for markets mostly. However, Amar Ranu, Head of Investment Products & Insights at Anand Rathi Shares and Stock Brokers, says there is a new thing to watch out for in this election. “What is different this time is strong domestic flows in the market, including combination of MF SIPs, other domestic institutions like insurance companies and direct retail flows, which led the markets to sustain its level in the past despite FIIs moving out.”  

Could this cushion a blow if FIIs move out in droves following a change in government due to anticipation of policy change? Some research papers have shown that the behaviour of FIIs and DIIs is negatively correlated to each other i.e. if FIIs buy, DIIs sell and vice versa.  

Ambareesh Baliga, an independent market consultant, says it is unlikely domestic investors can cushion a blow. “Maybe money won’t move out too quickly but if there is an unexpected election result then a sharp fall is definitely anticipated, just like 2004.” 

While analysts and investment advisors are warning of a sharp fall, they reiterate that the growth trajectory of Indian stock markets is unlikely to be affected. An analysis of tenures of four prime ministers who completed five years in office tells a similar story.  

India’s stock markets have continued to grow strength to strength under different prime ministers. From around 1,000 during the liberalisation in 1991, markets have managed to reach 66,000 in 2023. Ranu says, “What the markets want to see is more of political stability rather than who comes to power. Even if the Opposition comes into power with a strong mandate, it would be positive for the market.” 

This growth story and the surge in investments is not likely to stop. Whether the markets will fall drastically, as predicted by several analysts, remains to be seen. But data suggests that the long-term prospects of the market remain safe from the short-term volatility due to an election.