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India Strategy Manishi Raychaudhuri (91 22) 6628 2403 B N P
P A R I B A S
15 April 2009 –
M A R K E T
O U T L O O K
Election 2009 – confusion galore •
India’s General Elections begin on 16 April and end on 13 May. There are no clear national issues or expectations.
•
UPA government without their former Left Front allies or the NDA Government appears to be the best-case scenario for the market, but these outcomes have low probability.
•
Prior to elections, we advocate caution with defensive portfolio stance. Sun Pharma, Bharti, M&M are top choices.
Elections in five phases start tomorrow India’s General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June. A highly fragmented political landscape The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls seem to indicate that their total seat share could decline. Both major alliances – Congress’ UPA and BJP’s NDA, have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but a ‘Fourth Front’ as well – consisting of parties who were members of the UPA or NDA in the last Parliament but are now reluctant to join any alliance. No clear issues, no clear expectations Election 2009 is characterized by a lack of strong national issues, and confusion among political experts and pollsters regarding the potential outcome. Consequently, state-level issues, and outcomes in some of the “swing” states have become important. Most opinion polls suggest UPA will get 190-200 seats, NDA 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts). Expect market correction during election After a 35% rally since 9 March, the Indian market is trading at 13.2xFY10E, and appears ripe for a correction. The market declined during three out of the past four elections, and we don’t expect any divergence from that trend. Go defensive during elections During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. We highlight Bharti, Sun Pharmaceuticals and M&M as our top picks during this phase of shortterm uncertainty. Post election sector choice to depend upon outcome A UPA Government not supported by Left parties or an NDA Government appears to be the best possible outcome from the market’s point of view. However, the probability of such an outcome appears low (less than 50% in our opinion), despite some recent improvement (according to media) in NDA’s chances. A “market-friendly” government should lead us to overweight banks, engineering and capital goods. BNP Paribas research is available on Thomson Reuters, Bloomberg, and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation. Please see the important notice on the back page.
Manishi Raychaudhuri BNP Paribas Securities India Pvt Ltd (91 22) 6628 2403 [email protected]
MANISHI
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General Election 2009 – a massive exercise Every five years, or sometimes even before the completion of the term (as was the case in the second half of the 1990s), India holds the General Elections. The largest democracy in the world (with nearly 715m voters, 543 Parliamentary seats) votes out the incumbent government or keeps it in office – though in the past 20 years, the former has been a more frequent outcome. In the six elections since 1989, only once – in 1999 – the incumbent ruling party (the BJP) – stayed in power after the elections. The sheer size of the General Election exercise (e.g. total number of eligible Indian voters is thrice that of the US which has 208m voters) makes it imperative that the elections are held in phases. General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all the 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June. Exhibit 1: Five Phases Of General Election 2009 States/UTs
No of constituencies
Andaman & Nicobar Islands
Phases
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
16-Apr
22, 23-Apr
30-Apr
07-May
13-May
11
3
1
1
1
42
2
22
2
1
2
Assam
14
2
3
11
Bihar
13
13
Andhra Pradesh Arunachal Pradesh
20
40
4
Chandigarh
1
1
Chhattisgarh
11
1
Dadra & Nagar Haveli
1
1
1
Daman & Diu
1
1
1
NCT of Delhi
7
1
Goa
2
1
Gujarat
26
1
Haryana
1 11
7 2 26
10
1
Himachal Pradesh
4
1
Jammu & Kashmir
6
5
1
1
Jharkhand
14
2
6
8
Karnataka
28
2
Kerala
20
1
20 1
Lakshadweep
10 4
17
11
13
16 10
1
1
Madhya Pradesh
29
2
Maharashtra
48
3
13
25
2
2
1
1
Manipur Meghalaya
2
1
2
Mizoram
1
1
1
Nagaland
1
1
1
21
2
10
1
1
Punjab
13
2
Rajasthan
25
1
1
1
Orissa Puducherry
Sikkim Tamil Nadu Tripura Uttar Pradesh
39
1
2
1
80
5
Uttarakhand
5
1
West Bengal
42
3
Total Constituencies
1
1
2
11 1 4
9
25 1 39 2 16
17
15
18
14
14
17
11
5
543
Total states/UTs polling on this day
124
141
107
85
86
17
13
11
8
9
Source: Election Commission of India
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Are elections important from the stock market’s point of view? Election experiences – particularly those from 1996, 1999 and 2004 – have taught us that for a developing economy like India, election results do matter – not just for the market in the short term, but also for the direction of the economic policy in the longer term. In 1996, within six months of a “Third Front” government assuming office, the BSE Sensex declined 25%. In 1999, a right-of-centre BJP Government assumed office and began a process of divestment of PSU companies. Such attempts at “second generation” economic reforms stopped in 2004, when a Congress-led UPA Government took office with Leftist support (and consequently, the economic policy was dictated by the Left parties for four subsequent years). 2009 elections are more critical than some of the previous ones The global economic slowdown has made developing economies particularly sensitive to policy decisions. For instance, if the new government of India indulges in populist economic policies (e.g. higher subsidies,) it could lead to further increase in fiscal deficit. Recent downgrade of India’s sovereign credit rating outlook to negative (from stable) by S&P underscores such risks. In this context, 2004 elections were not so critical – global economy was in a high growth period, all asset markets were in a liquidity-driven boom, and despite the stoppage of economic reforms, Indian economy grew at its most rapid pace during FY2004-2008. We can hardly hope for such benign outcomes now. The upcoming elections are characterised by the following: 1)
One of the most fractured political landscapes in recent times: The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls indicate that their total seat share could decline. Both major alliances – Congress’ United Progressive Alliance (UPA) and BJP’s National Democratic Alliance (NDA) have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but also a ‘Fourth Front’ as well (though not formally named so) – of parties who were members of UPA or NDA in the last Parliament but are yet to join any alliance now.
Exhibit 2: Composition Of Various Alliances In 2004 Total UPA
INC
RJD
DMK
NCP
PMK
TRS
JMM
LJP
Others
Number of seats
145
24
16
9
6
5
5
4
9
NDA
BJP
SS
JD(U) Akali Dal
BJD
TDP
Others
Number of seats
138
12
8
11
5
4
Outside support for UPA
8
LEFT
MDMK
Others
Number of seats
59
4
3
Others
SP
BSP
JD(S)
AGP
TC
Others
Number of seats
36
19
3
2
2
6
223
186
66
68
(Note: Originally in 2004 Left supported UPA from outside. In July 2008 Left withdrew support and SP supported UPA) Source: Election Commission
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Exhibit 3: Composition Of Various Alliances In 2009 Total UPA
INC
DMK
NCP
JMM
TC
Others
Seats
150
16
10
5
2
4
NDA
BJP
SS
JD(U)
Akali Dal
Others
Seats
111
12
8
7
5
LEFT
TDP
TRS
JDS
BSP
BJD
59
5
3
2
16
11
RJD
SP
LJP
PRP
PDP
24
31
3
0
1
AIADMK
PMK
Independents and others
0
6
5
3rd Front Seats "4th Front" Seats Non-Aligned parties Seats
187 143 96 59 11
Sources: Election Commission; Media reports; statements by political parties
2)
Clear lack of strong issues, and confusion among political experts and pollsters regarding potential outcome: Most opinion polls seem to suggest that the UPA will bag 190-200 seats, the NDA about 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts). However, it is pertinent to mention that with rapid defections from old alliances, and with new alliances being struck almost every day, the definitions of the “UPA” and “NDA” have become moving targets.
Exhibit 4: Opinion Polls Published Till Date Agency
Date
UPA
NDA
Others
23-Feb-09
215-235
165-185
130-150
The Pioneer
3-Feb-09
196
181
166
Times of India
6-Mar-09
206
195
147
DNA
9-Mar-09
202
174
167
Deccan Chronicle
9-Mar-09
205
180
158
Deccan Chronicle
15-Mar-09
200
180
163 172
CNN-IBN-CSDS
DNA
23-Mar-09
201
170
Star-Nielson Poll
23-Mar-09
257
184
96
2-Apr-09
190-199
172-181
160-180
11-Apr-09
203
191
149
India today poll Star-Nielson Poll Source: Press reports
It is also pertinent to note that the composition in Exhibit-3 may not represent today’s ground reality. For instance, AIADMK has gained considerable ground primarily on populist measures and anti-incumbency sentiment. SP has lost ground in Uttar Pradesh (constitutes nearly 15% of the total seats) to the BSP. The Left is also expected to lose ground to the Trinamool Congress (TC) in West Bengal due to discontent against acquisition of agricultural land for industrial purposes, and the fact that Congress and TC have come together.
Likely outcomes and market behaviour in each scenario Guessing this year’s Election outcome is a nearly impossible exercise, as we learnt in 2004. Our interaction with political experts and industry participants indicates that apart from a government with a strong Leftist participation, almost all outcomes could be looked upon favourably by the industry. We try to identify a few possible outcomes and their potential impact on the market. 1)
Congress-led narrow coalition (without Left support): The Congress unencumbered by the Left will probably be able to take a more industry-friendly and a less populist route. Such an outcome could be a significant positive for the markets.
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2)
Congress-led broad coalition with support from the Third Front (including the Left): This scenario would mean another indecisive term in which taking tough policy decisions will be very difficult. Populist agendas will dominate and the fiscal situation may worsen. This scenario would mean negative sentiment for the market.
3)
BJP-led broad coalition: Though the probability of such a right-of-centre government being formed appears low, such a coalition would necessarily exclude the Left. We, however, believe that this scenario is very unlikely given the problems faced by BJP in sealing alliances. However, such an eventuality would be a strong positive for the markets.
4)
Third Front led coalition with support from the Congress: This could be the worst possible outcome for the markets with possibility of in-fighting, continued populist measures and another General Election before the end of the existing government’s term.
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Exhibit 5: Different Outcomes And Their Probabilities Outcome
What would be necessary to make this outcome possible
Probability of
Market reaction if
outcome
outcome materialises
UPA Government without Left Congress wins 170-175 seats, SP and RJD 25-30 each, NCP and
(%)
(%)
20
+15-20
35
-10 to -15
20
+20 to 30
25
-20 to -30
DMK 15-20 each. Fourth Front supports UPA UPA Government with Left
Congress wins 135-140. UPA along with Fourth Front fall short of
support
majority by 35-40 seats
NDA Government with Fourth BJP gets 150+, NDA gets 200, BJD comes back to NDA, Fourth Front
Front (~60 seats) supports NDA
Third Front Government with
BSP gets 50 seats; Left gets 40; BJD, TDP, TRS get another 30.
Congress support
Congress falls below 130
Source: BNP Paribas estimates
The probabilities that we attach to the various outcomes could be contentious. We have relied on the opinion polls published till date. Currently, opinion polls forecast Congress could win somewhere between 133 to 155 seats, while the BJP may win between 137 and 147 seats. The UPA Government with a narrow coalition or the NDA Government with support from the Fourth Front should necessitate significantly larger tallies for Congress or BJP than the current forecasts – leading us to attach low probabilities to these events. Opinion polls have been significantly off the mark in several previous elections, but now we have no other data to base our estimates on. What’s significant is our belief about market reaction in each outcome. We attach a total of 60% probability to events that could bring about a downward correction to the market. In Exhibit 5, we haven’t discussed one possibility that’s being talked about in the political circles recently – that of the Congress and BJP coming together in a post-poll alliance. This could be the most positive outcome from the market and industry’s point of view. However, the possibility of this outcome materialising appears remote as currently there seems to be irreconcilable differences between the leaders of the two parties.
States and regional issues hold the key The absence of national issues in the 2009 elections means that the outcome could turn out to be a “sum-total of several state elections”. For instance in Tamil Nadu, Andhra Pradesh, West Bengal, and Maharashtra, elections seem to be contested entirely on state-level issues of corruption, anti-incumbency, law and order, etc. If the outcomes in some of these states turn out to be significantly different than what it was
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in 2004 (refer Exhibit 6), the total tally of seats for the leading alliance could change drastically. While Exhibit 6 has the top 13 parties in terms of seat count, important parties like the AIADMK, Trinamool Congress do not feature here. These parties could play a crucial role this time. Some changes appear obvious. The BSP, for instance, could increase its tally considerably, going by its strong performance in the UP assembly elections. The key states to watch out for UP, Andhra Pradesh, West Bengal, Maharashtra, Tamil Nadu and Kerala. These states make up 50% of the seats. In A.P., West Bengal, Maharashtra and T.N., anti-incumbency sentiment appears strong. In Kerala, the electoral outcome flip-flops between the Left and the Congress every five years. In UP, the outcome of 2004 election could change drastically in 2009 due to the ascendancy of BSP. Exhibit 6: Sate-Wise Position Of Prominent Political Parties In 2004 Elections States
Seats available
INC
BJP
Left front
SP
RJD
BSP
DMK
SHS
BJD
NCP
JD(U)
1
1
0
0
0
0
0
0
0
0
0
0
0
42
29
0
2
0
0
0
0
0
0
0
0
0
Andaman & Nicobar Andhra Pradesh Arunachal Pradesh
SAD
2
0
2
0
0
0
0
0
0
0
0
0
0
Assam
14
9
2
0
0
0
0
0
0
0
0
0
0
Bihar
40
3
5
0
0
22
0
0
0
0
0
6
0
Chandigarh
1
1
0
0
0
0
0
0
0
0
0
0
0
Chhattisgarh
11
1
10
0
0
0
0
0
0
0
0
0
0
Dadra & Nagar Haveli
1
0
0
0
0
0
0
0
0
0
0
0
0
Daman & Diu
1
1
0
0
0
0
0
0
0
0
0
0
0
Goa
2
1
1
0
0
0
0
0
0
0
0
0
0
Gujarat
26
12
14
0
0
0
0
0
0
0
0
0
0
Haryana
10
9
1
0
0
0
0
0
0
0
0
0
0
Himachal Pradesh
4
3
1
0
0
0
0
0
0
0
0
0
0
Jammu & Kashmir
6
2
0
0
0
0
0
0
0
0
0
0
0
14
6
1
1
0
2
0
0
0
0
0
0
0
Jharkhand Karnataka
28
8
18
0
0
0
0
0
0
0
0
0
0
Kerala
20
0
0
15
0
0
0
0
0
0
0
0
0 0
Lakshadweep
1
0
0
0
0
0
0
0
0
0
0
1
Madhya Pradesh
29
4
25
0
0
0
0
0
0
0
0
0
0
Maharashtra
48
13
13
0
0
0
0
0
12
0
9
0
0
Manipur
2
1
0
0
0
0
0
0
0
0
0
0
0
Meghalaya
2
1
0
0
0
0
0
0
0
0
0
0
0
Mizoram
1
0
0
0
0
0
0
0
0
0
0
0
0
Nagaland
1
0
0
0
0
0
0
0
0
0
0
0
0 0
Delhi
7
6
1
0
0
0
0
0
0
0
0
0
21
2
7
0
0
0
0
0
0
11
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
Punjab
13
2
3
0
0
0
0
0
0
0
0
0
8
Rajasthan
25
4
21
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
39
10
0
4
0
0
0
16
0
0
0
0
0
2
0
0
2
0
0
0
0
0
0
0
0
0
80
9
10
0
35
0
19
0
0
0
0
1
0
5
1
3
0
1
0
0
0
0
0
0
0
0
Orissa Pondicherry
Sikkim Tamil Nadu Tripura Up Uttaranchal West Bengal
42
6
0
35
0
0
0
0
0
0
0
0
0
Grand total
543
145
138
59
36
24
19
16
12
11
9
8
8
Source: Election Commission of India
Economic policy direction after the election The election manifestos of the various parties provide some pointers to the economic policies likely to be adopted by them if they come to power. Most manifestos are on expected lines. National security, infrastructure and bringing back black money appear on the agendas of most political parties. In addition, the BJP has talked about tax cuts
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for middle-income groups. The Congress has talked about continuing with populist measures like National Rural Employment Guarantee Scheme (NREGS), and rationalisation of tax policies with single Goods and Services tax (GST) to replace the current indirect taxes (excise and customs duties). The Left is steadfast in its opposition to FDI (in retail, insurance, media), labour law reforms, banking and pension reforms, and is opposed to capital account convertibility and FII investment through the Participatory Note (PN) route. It is no surprise that the industry perceives a Leftdominated or Left-supported government with maximum caution. In Exhibit 7, we try to analyse which are the key reform measures pending, and which of these could or couldn’t go through under the different post-election scenarios presented by us. We acknowledge, however, that on some of these issues (e.g. fuel subsidies), a few political parties have expressed no opinion. In such cases, we have relied on our judgement (based on previous policies and track record) about how each party could act on that particular issue. Exhibit 7: Economic Reforms: What Measures Are Awaited? Measures
UPA coalition without
UPA coalition with Left
NDA coalition
Third front supported by
Left
INC
1. Opening up FDI rules
Possible in a narrow
Left will prevent opening
Will encourage foreign
No possibility of opening
particularly in retailing,
coalition
up of FDIs in retail,
capital into these sectors
up FDI
insurance etc. 2. Disinvestment
insurance, realty May disinvest stake in
Difficult with left opposing
Actively disinvest PSUs,
Will vehemently oppose
select PSUs
disinvestment
which may free up capital
disinvestment
3. Reduction of subsidies
No strong opinion
Left will not allow a free
Was moving toward
Will support a continued
(fuel, fertilizer, food)
expressed
pricing mechanism
subsidy reduction during
administered pricing
its term. Some subsidy
mechanism
reduction could come through 4. Labor law reform
Less controls to be
Left will oppose any labor
Will support labor reforms
No possibility of reforms
(Industrial disputes Act,
imposed on companies in
law reforms
and give employers more
with possible reversal of
Contract law Act etc)
terms of hiring policy
flexibility.
supreme court legislation against strikes
5. Investment in
Will support investments in Will support investments in Will increase focus on rural Greater government
Infrastructure
infrastructure with focus on infrastructure with focus on connectivity and roads
spending would mean
the power sector
the power sector
infrastructure
more investments in Infra
Fiscal responsibility with
Populist measures are
Reduction of taxes could
Will ensure massive
lesser populist measures
likely to continue, though
increase fiscal deficit, but
amounts of govt. spending
could improve the fiscal
the fiscal situation may not reduction of subsidies and
which may worsen fiscal
position
worsen much
divestment of PSUs could
situation. Left is opposed
neutralize it.
to FRBM.
6. Reducing Fiscal deficit
7. Land reforms/rent
Will support quicker
Left will make it difficult to
Will support quicker
Left opposes land reforms
/tenancy laws
approvals for setting up
get quick land approvals
approvals for setting up
and SEZ creation, with
SEZ but unlikely to oppose for SEZ's
SEZ but unlikely to oppose strict labor laws in SEZs.
rent control/tenancy laws
rent control/tenancy laws
Source: BNP Paribas estimates
In summary, all political parties seem to approve “easy reforms” like infrastructure investments, while “hard reforms” like changes to labour laws are not favoured by any.
How do the market and different sectors behave around elections? Indian elections are a long drawn-out affair (except in 1998), so it makes sense to look at market behaviour both during elections and after elections. A look at Exhibit 7 brings out a few conclusions:
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1)
During elections, the market almost always tends to decline. Uncertainty regarding outcome usually increases during the different phases of elections and leads to market decline. During the past four elections, the market went up (that too, only marginally) only during the 1998 elections – and that was the shortest election in recent history.
2)
Behavior of market after the elections depends on the election’s outcome. Usually the market tends to move up, because of the “end of uncertainty” phenomenon, even if the outcome is not market friendly. The 1996 election (when Third Front came to power) is a case in point. However, if the election outcome is significantly worse than what the market expects, the market may decline significantly – which was the case in 2004.
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During the 2009 elections, there are no expectations about outcomes that have got discounted in the market. The 35% rally in the Indian market since 9 March should not be characterised as a “pre-election rally” as the driver of that rally is an expectation that fiscal stimulus in Asia (particularly China) should lead to improved economic performance in the region. We believe, during the 2009 elections, the Indian market is likely to drift down, like in the previous instances. Sectoral behaviour around elections is more erratic. No sector appears truly election proof. Sectors have behaved very differently depending on what kind of a government comes to power. A few conclusions can still be drawn from Exhibit 8. 1)
During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. These sectors outperformed during three out of the past four elections. Telecom and pharmaceuticals are defensive sectors and tend to outperform in a falling market. Autos and telecoms are usually the beneficiaries of election spending (in addition to some smaller sectors like print media).
2)
The most consistent underperformers during elections are banks and materials (oil and gas, metals). These sectors are most sensitive to policy decisions (for instance, moral suasion to banks for increased lending, or reduction in domestic oil prices leading to higher under-recoveries for oil companies)
3)
Post elections, IT is the most consistent outperformer. During elections, the sector’s performance is inconsistent relative to the market. However, after an election, the market appreciates the “politics-independent” nature of the sector.
4)
Banks, utilities, oil and gas and engineering and capital goods are the sectors that are most sensitive to election outcomes. The first three are regulation-driven. The engineering sector’s fortune depends critically on the commitment shown by the government toward infrastructure investments.
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Exhibit 8: Market And Sector Performance During And After Elections Sectors (%)
Elections 1996
Elections 1998
30/05/96
month
month
(election
post end
post end
period)
date
date
Oil and Gas
(2.9)
1.3
(8.7)
0.8
1.0
1.9
12.4
2.5
10.6
Pharmaceuticals
(6.5)
4.0
1.9
3.2
9.9
9.6
9.0
(8.7)
2.0
Banks
(7.9)
8.9
0.9
0.8
16.3
22.0
(2.8)
5.3
IT
(9.5)
(3.8)
(14.4)
8.3
22.4
84.4
33.1
0.1
3.6
0.9
(1.4)
1.5
33.1
46.4
(14.5)
Metals
(4.5)
1.8
(12.7)
(2.8)
17.9
30.9
(2.9)
E&C
(4.0)
4.7
(10.4)
2.5
19.8
20.2
(4.0)
Utilities
(2.7)
14.0
4.8
5.5
15.9
3.0
(9.0)
+1M
+2M
05/09/99-
+1M
ELECTIONS 2004
Till 1
Electrical equipment
Till 2 16/02/98 -
ELECTIONS 1999
27/04/96-
+2M 20/04/04 -
+1M
+2M
(5.1)
(20.3)
(24.2)
3.5
(6.9)
(10.6)
22.2
(1.3)
(18.0)
(23.9)
14.9
(4.3)
(0.5)
3.8
3.4
(3.0)
(1.4)
(19.8)
(11.4)
(1.4)
(5.2)
(7.8)
(10.0)
(6.0)
16.0
20.2
(4.2)
(18.5)
(14.2)
(8.0)
(0.5)
(5.1)
(27.9)
(24.1)
10/05/04
06/10/99
23/02/98
Autos
2.0
10.6
6.7
1.0
20.5
27.4
(13.5)
(1.0)
(3.0)
(3.2)
(9.5)
(5.7)
Realty
2.7
(2.6)
(19.5)
(2.9)
(2.9)
20.6
(22.0)
(3.1)
6.3
1.2
1.2
(6.1)
Telecom
(0.8)
(0.6)
(5.9)
3.1
4.4
8.9
5.4
26.2
64.4
(6.2)
(11.9)
(3.1)
Cement
(5.6)
2.8
(11.7)
3.1
11.0
24.6
(11.3)
16.4
8.1
2.2
(9.7)
(12.6)
Consumer staples
(5.1)
9.3
6.6
1.2
15.1
13.4
(0.4
(12.0)
(15.8)
(4.8)
(6.6)
(5.1)
Sensex
(1.7)
3.0
(5.7)
0.8
13.5
16.5
(0.3)
(2.1)
0.3
(4.3)
(10.7)
(11.0)
BSE100
(1.7)
3.0
(5.2)
1.2
14.7
18.6
4.2
(1.8)
4.9
(4.1)
(11.5)
(11.6)
Sources: Bloomberg; BNP Paribas estimates
We therefore recommend that investors overweight telecommunication, pharmaceuticals, and select automobile stocks during the elections. It is too early to take a call on the post-election scenario, but a “market-friendly” government should lead us to overweight banks, engineering and capital goods.
9
BNP
PARIBAS
MANISHI
RAYCHAUDHURI
DISCLAIMERS
&
INDIA
STRATEGY
15
APRIL
2009
DISCLOSURES
This report was produced by a member company of the BNP Paribas Group (“Group”). This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities and advising on securities. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report is being distributed in the United States by BNP Paribas Securities (Asia) Limited and is intended for distribution in the United States only to “major institutional investors’ (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the National Association of Securities Dealers and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited. Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. Recommendation structure
Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. © 2009 BNP Paribas Group
10
BNP
PARIBAS
P A R I B A S
15 April 2009 –
M A R K E T
O U T L O O K
Election 2009 – confusion galore •
India’s General Elections begin on 16 April and end on 13 May. There are no clear national issues or expectations.
•
UPA government without their former Left Front allies or the NDA Government appears to be the best-case scenario for the market, but these outcomes have low probability.
•
Prior to elections, we advocate caution with defensive portfolio stance. Sun Pharma, Bharti, M&M are top choices.
Elections in five phases start tomorrow India’s General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June. A highly fragmented political landscape The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls seem to indicate that their total seat share could decline. Both major alliances – Congress’ UPA and BJP’s NDA, have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but a ‘Fourth Front’ as well – consisting of parties who were members of the UPA or NDA in the last Parliament but are now reluctant to join any alliance. No clear issues, no clear expectations Election 2009 is characterized by a lack of strong national issues, and confusion among political experts and pollsters regarding the potential outcome. Consequently, state-level issues, and outcomes in some of the “swing” states have become important. Most opinion polls suggest UPA will get 190-200 seats, NDA 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts). Expect market correction during election After a 35% rally since 9 March, the Indian market is trading at 13.2xFY10E, and appears ripe for a correction. The market declined during three out of the past four elections, and we don’t expect any divergence from that trend. Go defensive during elections During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. We highlight Bharti, Sun Pharmaceuticals and M&M as our top picks during this phase of shortterm uncertainty. Post election sector choice to depend upon outcome A UPA Government not supported by Left parties or an NDA Government appears to be the best possible outcome from the market’s point of view. However, the probability of such an outcome appears low (less than 50% in our opinion), despite some recent improvement (according to media) in NDA’s chances. A “market-friendly” government should lead us to overweight banks, engineering and capital goods. BNP Paribas research is available on Thomson Reuters, Bloomberg, and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation. Please see the important notice on the back page.
Manishi Raychaudhuri BNP Paribas Securities India Pvt Ltd (91 22) 6628 2403 [email protected]
MANISHI
RAYCHAUDHURI
INDIA
STRATEGY
15
APRIL
2009
General Election 2009 – a massive exercise Every five years, or sometimes even before the completion of the term (as was the case in the second half of the 1990s), India holds the General Elections. The largest democracy in the world (with nearly 715m voters, 543 Parliamentary seats) votes out the incumbent government or keeps it in office – though in the past 20 years, the former has been a more frequent outcome. In the six elections since 1989, only once – in 1999 – the incumbent ruling party (the BJP) – stayed in power after the elections. The sheer size of the General Election exercise (e.g. total number of eligible Indian voters is thrice that of the US which has 208m voters) makes it imperative that the elections are held in phases. General Election 2009 shall be held in five phases – starting on 16 April, and ending on 13 May. The results for all the 543 Parliamentary seats shall be declared on 16 May, and the new government shall assume office by 3 June. Exhibit 1: Five Phases Of General Election 2009 States/UTs
No of constituencies
Andaman & Nicobar Islands
Phases
Phase 1
Phase 2
Phase 3
Phase 4
Phase 5
16-Apr
22, 23-Apr
30-Apr
07-May
13-May
11
3
1
1
1
42
2
22
2
1
2
Assam
14
2
3
11
Bihar
13
13
Andhra Pradesh Arunachal Pradesh
20
40
4
Chandigarh
1
1
Chhattisgarh
11
1
Dadra & Nagar Haveli
1
1
1
Daman & Diu
1
1
1
NCT of Delhi
7
1
Goa
2
1
Gujarat
26
1
Haryana
1 11
7 2 26
10
1
Himachal Pradesh
4
1
Jammu & Kashmir
6
5
1
1
Jharkhand
14
2
6
8
Karnataka
28
2
Kerala
20
1
20 1
Lakshadweep
10 4
17
11
13
16 10
1
1
Madhya Pradesh
29
2
Maharashtra
48
3
13
25
2
2
1
1
Manipur Meghalaya
2
1
2
Mizoram
1
1
1
Nagaland
1
1
1
21
2
10
1
1
Punjab
13
2
Rajasthan
25
1
1
1
Orissa Puducherry
Sikkim Tamil Nadu Tripura Uttar Pradesh
39
1
2
1
80
5
Uttarakhand
5
1
West Bengal
42
3
Total Constituencies
1
1
2
11 1 4
9
25 1 39 2 16
17
15
18
14
14
17
11
5
543
Total states/UTs polling on this day
124
141
107
85
86
17
13
11
8
9
Source: Election Commission of India
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PARIBAS
MANISHI
RAYCHAUDHURI
INDIA
STRATEGY
15
APRIL
2009
Are elections important from the stock market’s point of view? Election experiences – particularly those from 1996, 1999 and 2004 – have taught us that for a developing economy like India, election results do matter – not just for the market in the short term, but also for the direction of the economic policy in the longer term. In 1996, within six months of a “Third Front” government assuming office, the BSE Sensex declined 25%. In 1999, a right-of-centre BJP Government assumed office and began a process of divestment of PSU companies. Such attempts at “second generation” economic reforms stopped in 2004, when a Congress-led UPA Government took office with Leftist support (and consequently, the economic policy was dictated by the Left parties for four subsequent years). 2009 elections are more critical than some of the previous ones The global economic slowdown has made developing economies particularly sensitive to policy decisions. For instance, if the new government of India indulges in populist economic policies (e.g. higher subsidies,) it could lead to further increase in fiscal deficit. Recent downgrade of India’s sovereign credit rating outlook to negative (from stable) by S&P underscores such risks. In this context, 2004 elections were not so critical – global economy was in a high growth period, all asset markets were in a liquidity-driven boom, and despite the stoppage of economic reforms, Indian economy grew at its most rapid pace during FY2004-2008. We can hardly hope for such benign outcomes now. The upcoming elections are characterised by the following: 1)
One of the most fractured political landscapes in recent times: The two major parties – Congress and BJP hold 52% of the total Parliamentary seats, and opinion polls indicate that their total seat share could decline. Both major alliances – Congress’ United Progressive Alliance (UPA) and BJP’s National Democratic Alliance (NDA) have suffered defections by their alliance partners. Therefore – not only do we have a Third Front today, but also a ‘Fourth Front’ as well (though not formally named so) – of parties who were members of UPA or NDA in the last Parliament but are yet to join any alliance now.
Exhibit 2: Composition Of Various Alliances In 2004 Total UPA
INC
RJD
DMK
NCP
PMK
TRS
JMM
LJP
Others
Number of seats
145
24
16
9
6
5
5
4
9
NDA
BJP
SS
JD(U) Akali Dal
BJD
TDP
Others
Number of seats
138
12
8
11
5
4
Outside support for UPA
8
LEFT
MDMK
Others
Number of seats
59
4
3
Others
SP
BSP
JD(S)
AGP
TC
Others
Number of seats
36
19
3
2
2
6
223
186
66
68
(Note: Originally in 2004 Left supported UPA from outside. In July 2008 Left withdrew support and SP supported UPA) Source: Election Commission
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STRATEGY
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APRIL
2009
Exhibit 3: Composition Of Various Alliances In 2009 Total UPA
INC
DMK
NCP
JMM
TC
Others
Seats
150
16
10
5
2
4
NDA
BJP
SS
JD(U)
Akali Dal
Others
Seats
111
12
8
7
5
LEFT
TDP
TRS
JDS
BSP
BJD
59
5
3
2
16
11
RJD
SP
LJP
PRP
PDP
24
31
3
0
1
AIADMK
PMK
Independents and others
0
6
5
3rd Front Seats "4th Front" Seats Non-Aligned parties Seats
187 143 96 59 11
Sources: Election Commission; Media reports; statements by political parties
2)
Clear lack of strong issues, and confusion among political experts and pollsters regarding potential outcome: Most opinion polls seem to suggest that the UPA will bag 190-200 seats, the NDA about 180-190 seats and about 150 seats will go to a mixed group of other parties (i.e. the Third and the Fourth fronts). However, it is pertinent to mention that with rapid defections from old alliances, and with new alliances being struck almost every day, the definitions of the “UPA” and “NDA” have become moving targets.
Exhibit 4: Opinion Polls Published Till Date Agency
Date
UPA
NDA
Others
23-Feb-09
215-235
165-185
130-150
The Pioneer
3-Feb-09
196
181
166
Times of India
6-Mar-09
206
195
147
DNA
9-Mar-09
202
174
167
Deccan Chronicle
9-Mar-09
205
180
158
Deccan Chronicle
15-Mar-09
200
180
163 172
CNN-IBN-CSDS
DNA
23-Mar-09
201
170
Star-Nielson Poll
23-Mar-09
257
184
96
2-Apr-09
190-199
172-181
160-180
11-Apr-09
203
191
149
India today poll Star-Nielson Poll Source: Press reports
It is also pertinent to note that the composition in Exhibit-3 may not represent today’s ground reality. For instance, AIADMK has gained considerable ground primarily on populist measures and anti-incumbency sentiment. SP has lost ground in Uttar Pradesh (constitutes nearly 15% of the total seats) to the BSP. The Left is also expected to lose ground to the Trinamool Congress (TC) in West Bengal due to discontent against acquisition of agricultural land for industrial purposes, and the fact that Congress and TC have come together.
Likely outcomes and market behaviour in each scenario Guessing this year’s Election outcome is a nearly impossible exercise, as we learnt in 2004. Our interaction with political experts and industry participants indicates that apart from a government with a strong Leftist participation, almost all outcomes could be looked upon favourably by the industry. We try to identify a few possible outcomes and their potential impact on the market. 1)
Congress-led narrow coalition (without Left support): The Congress unencumbered by the Left will probably be able to take a more industry-friendly and a less populist route. Such an outcome could be a significant positive for the markets.
4
BNP
PARIBAS
MANISHI
RAYCHAUDHURI
INDIA
STRATEGY
15
2)
Congress-led broad coalition with support from the Third Front (including the Left): This scenario would mean another indecisive term in which taking tough policy decisions will be very difficult. Populist agendas will dominate and the fiscal situation may worsen. This scenario would mean negative sentiment for the market.
3)
BJP-led broad coalition: Though the probability of such a right-of-centre government being formed appears low, such a coalition would necessarily exclude the Left. We, however, believe that this scenario is very unlikely given the problems faced by BJP in sealing alliances. However, such an eventuality would be a strong positive for the markets.
4)
Third Front led coalition with support from the Congress: This could be the worst possible outcome for the markets with possibility of in-fighting, continued populist measures and another General Election before the end of the existing government’s term.
APRIL
2009
Exhibit 5: Different Outcomes And Their Probabilities Outcome
What would be necessary to make this outcome possible
Probability of
Market reaction if
outcome
outcome materialises
UPA Government without Left Congress wins 170-175 seats, SP and RJD 25-30 each, NCP and
(%)
(%)
20
+15-20
35
-10 to -15
20
+20 to 30
25
-20 to -30
DMK 15-20 each. Fourth Front supports UPA UPA Government with Left
Congress wins 135-140. UPA along with Fourth Front fall short of
support
majority by 35-40 seats
NDA Government with Fourth BJP gets 150+, NDA gets 200, BJD comes back to NDA, Fourth Front
Front (~60 seats) supports NDA
Third Front Government with
BSP gets 50 seats; Left gets 40; BJD, TDP, TRS get another 30.
Congress support
Congress falls below 130
Source: BNP Paribas estimates
The probabilities that we attach to the various outcomes could be contentious. We have relied on the opinion polls published till date. Currently, opinion polls forecast Congress could win somewhere between 133 to 155 seats, while the BJP may win between 137 and 147 seats. The UPA Government with a narrow coalition or the NDA Government with support from the Fourth Front should necessitate significantly larger tallies for Congress or BJP than the current forecasts – leading us to attach low probabilities to these events. Opinion polls have been significantly off the mark in several previous elections, but now we have no other data to base our estimates on. What’s significant is our belief about market reaction in each outcome. We attach a total of 60% probability to events that could bring about a downward correction to the market. In Exhibit 5, we haven’t discussed one possibility that’s being talked about in the political circles recently – that of the Congress and BJP coming together in a post-poll alliance. This could be the most positive outcome from the market and industry’s point of view. However, the possibility of this outcome materialising appears remote as currently there seems to be irreconcilable differences between the leaders of the two parties.
States and regional issues hold the key The absence of national issues in the 2009 elections means that the outcome could turn out to be a “sum-total of several state elections”. For instance in Tamil Nadu, Andhra Pradesh, West Bengal, and Maharashtra, elections seem to be contested entirely on state-level issues of corruption, anti-incumbency, law and order, etc. If the outcomes in some of these states turn out to be significantly different than what it was
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STRATEGY
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2009
in 2004 (refer Exhibit 6), the total tally of seats for the leading alliance could change drastically. While Exhibit 6 has the top 13 parties in terms of seat count, important parties like the AIADMK, Trinamool Congress do not feature here. These parties could play a crucial role this time. Some changes appear obvious. The BSP, for instance, could increase its tally considerably, going by its strong performance in the UP assembly elections. The key states to watch out for UP, Andhra Pradesh, West Bengal, Maharashtra, Tamil Nadu and Kerala. These states make up 50% of the seats. In A.P., West Bengal, Maharashtra and T.N., anti-incumbency sentiment appears strong. In Kerala, the electoral outcome flip-flops between the Left and the Congress every five years. In UP, the outcome of 2004 election could change drastically in 2009 due to the ascendancy of BSP. Exhibit 6: Sate-Wise Position Of Prominent Political Parties In 2004 Elections States
Seats available
INC
BJP
Left front
SP
RJD
BSP
DMK
SHS
BJD
NCP
JD(U)
1
1
0
0
0
0
0
0
0
0
0
0
0
42
29
0
2
0
0
0
0
0
0
0
0
0
Andaman & Nicobar Andhra Pradesh Arunachal Pradesh
SAD
2
0
2
0
0
0
0
0
0
0
0
0
0
Assam
14
9
2
0
0
0
0
0
0
0
0
0
0
Bihar
40
3
5
0
0
22
0
0
0
0
0
6
0
Chandigarh
1
1
0
0
0
0
0
0
0
0
0
0
0
Chhattisgarh
11
1
10
0
0
0
0
0
0
0
0
0
0
Dadra & Nagar Haveli
1
0
0
0
0
0
0
0
0
0
0
0
0
Daman & Diu
1
1
0
0
0
0
0
0
0
0
0
0
0
Goa
2
1
1
0
0
0
0
0
0
0
0
0
0
Gujarat
26
12
14
0
0
0
0
0
0
0
0
0
0
Haryana
10
9
1
0
0
0
0
0
0
0
0
0
0
Himachal Pradesh
4
3
1
0
0
0
0
0
0
0
0
0
0
Jammu & Kashmir
6
2
0
0
0
0
0
0
0
0
0
0
0
14
6
1
1
0
2
0
0
0
0
0
0
0
Jharkhand Karnataka
28
8
18
0
0
0
0
0
0
0
0
0
0
Kerala
20
0
0
15
0
0
0
0
0
0
0
0
0 0
Lakshadweep
1
0
0
0
0
0
0
0
0
0
0
1
Madhya Pradesh
29
4
25
0
0
0
0
0
0
0
0
0
0
Maharashtra
48
13
13
0
0
0
0
0
12
0
9
0
0
Manipur
2
1
0
0
0
0
0
0
0
0
0
0
0
Meghalaya
2
1
0
0
0
0
0
0
0
0
0
0
0
Mizoram
1
0
0
0
0
0
0
0
0
0
0
0
0
Nagaland
1
0
0
0
0
0
0
0
0
0
0
0
0 0
Delhi
7
6
1
0
0
0
0
0
0
0
0
0
21
2
7
0
0
0
0
0
0
11
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
Punjab
13
2
3
0
0
0
0
0
0
0
0
0
8
Rajasthan
25
4
21
0
0
0
0
0
0
0
0
0
0
1
0
0
0
0
0
0
0
0
0
0
0
0
39
10
0
4
0
0
0
16
0
0
0
0
0
2
0
0
2
0
0
0
0
0
0
0
0
0
80
9
10
0
35
0
19
0
0
0
0
1
0
5
1
3
0
1
0
0
0
0
0
0
0
0
Orissa Pondicherry
Sikkim Tamil Nadu Tripura Up Uttaranchal West Bengal
42
6
0
35
0
0
0
0
0
0
0
0
0
Grand total
543
145
138
59
36
24
19
16
12
11
9
8
8
Source: Election Commission of India
Economic policy direction after the election The election manifestos of the various parties provide some pointers to the economic policies likely to be adopted by them if they come to power. Most manifestos are on expected lines. National security, infrastructure and bringing back black money appear on the agendas of most political parties. In addition, the BJP has talked about tax cuts
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2009
for middle-income groups. The Congress has talked about continuing with populist measures like National Rural Employment Guarantee Scheme (NREGS), and rationalisation of tax policies with single Goods and Services tax (GST) to replace the current indirect taxes (excise and customs duties). The Left is steadfast in its opposition to FDI (in retail, insurance, media), labour law reforms, banking and pension reforms, and is opposed to capital account convertibility and FII investment through the Participatory Note (PN) route. It is no surprise that the industry perceives a Leftdominated or Left-supported government with maximum caution. In Exhibit 7, we try to analyse which are the key reform measures pending, and which of these could or couldn’t go through under the different post-election scenarios presented by us. We acknowledge, however, that on some of these issues (e.g. fuel subsidies), a few political parties have expressed no opinion. In such cases, we have relied on our judgement (based on previous policies and track record) about how each party could act on that particular issue. Exhibit 7: Economic Reforms: What Measures Are Awaited? Measures
UPA coalition without
UPA coalition with Left
NDA coalition
Third front supported by
Left
INC
1. Opening up FDI rules
Possible in a narrow
Left will prevent opening
Will encourage foreign
No possibility of opening
particularly in retailing,
coalition
up of FDIs in retail,
capital into these sectors
up FDI
insurance etc. 2. Disinvestment
insurance, realty May disinvest stake in
Difficult with left opposing
Actively disinvest PSUs,
Will vehemently oppose
select PSUs
disinvestment
which may free up capital
disinvestment
3. Reduction of subsidies
No strong opinion
Left will not allow a free
Was moving toward
Will support a continued
(fuel, fertilizer, food)
expressed
pricing mechanism
subsidy reduction during
administered pricing
its term. Some subsidy
mechanism
reduction could come through 4. Labor law reform
Less controls to be
Left will oppose any labor
Will support labor reforms
No possibility of reforms
(Industrial disputes Act,
imposed on companies in
law reforms
and give employers more
with possible reversal of
Contract law Act etc)
terms of hiring policy
flexibility.
supreme court legislation against strikes
5. Investment in
Will support investments in Will support investments in Will increase focus on rural Greater government
Infrastructure
infrastructure with focus on infrastructure with focus on connectivity and roads
spending would mean
the power sector
the power sector
infrastructure
more investments in Infra
Fiscal responsibility with
Populist measures are
Reduction of taxes could
Will ensure massive
lesser populist measures
likely to continue, though
increase fiscal deficit, but
amounts of govt. spending
could improve the fiscal
the fiscal situation may not reduction of subsidies and
which may worsen fiscal
position
worsen much
divestment of PSUs could
situation. Left is opposed
neutralize it.
to FRBM.
6. Reducing Fiscal deficit
7. Land reforms/rent
Will support quicker
Left will make it difficult to
Will support quicker
Left opposes land reforms
/tenancy laws
approvals for setting up
get quick land approvals
approvals for setting up
and SEZ creation, with
SEZ but unlikely to oppose for SEZ's
SEZ but unlikely to oppose strict labor laws in SEZs.
rent control/tenancy laws
rent control/tenancy laws
Source: BNP Paribas estimates
In summary, all political parties seem to approve “easy reforms” like infrastructure investments, while “hard reforms” like changes to labour laws are not favoured by any.
How do the market and different sectors behave around elections? Indian elections are a long drawn-out affair (except in 1998), so it makes sense to look at market behaviour both during elections and after elections. A look at Exhibit 7 brings out a few conclusions:
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1)
During elections, the market almost always tends to decline. Uncertainty regarding outcome usually increases during the different phases of elections and leads to market decline. During the past four elections, the market went up (that too, only marginally) only during the 1998 elections – and that was the shortest election in recent history.
2)
Behavior of market after the elections depends on the election’s outcome. Usually the market tends to move up, because of the “end of uncertainty” phenomenon, even if the outcome is not market friendly. The 1996 election (when Third Front came to power) is a case in point. However, if the election outcome is significantly worse than what the market expects, the market may decline significantly – which was the case in 2004.
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During the 2009 elections, there are no expectations about outcomes that have got discounted in the market. The 35% rally in the Indian market since 9 March should not be characterised as a “pre-election rally” as the driver of that rally is an expectation that fiscal stimulus in Asia (particularly China) should lead to improved economic performance in the region. We believe, during the 2009 elections, the Indian market is likely to drift down, like in the previous instances. Sectoral behaviour around elections is more erratic. No sector appears truly election proof. Sectors have behaved very differently depending on what kind of a government comes to power. A few conclusions can still be drawn from Exhibit 8. 1)
During elections, the most consistent outperformers are pharmaceuticals, telecoms and autos. These sectors outperformed during three out of the past four elections. Telecom and pharmaceuticals are defensive sectors and tend to outperform in a falling market. Autos and telecoms are usually the beneficiaries of election spending (in addition to some smaller sectors like print media).
2)
The most consistent underperformers during elections are banks and materials (oil and gas, metals). These sectors are most sensitive to policy decisions (for instance, moral suasion to banks for increased lending, or reduction in domestic oil prices leading to higher under-recoveries for oil companies)
3)
Post elections, IT is the most consistent outperformer. During elections, the sector’s performance is inconsistent relative to the market. However, after an election, the market appreciates the “politics-independent” nature of the sector.
4)
Banks, utilities, oil and gas and engineering and capital goods are the sectors that are most sensitive to election outcomes. The first three are regulation-driven. The engineering sector’s fortune depends critically on the commitment shown by the government toward infrastructure investments.
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2009
Exhibit 8: Market And Sector Performance During And After Elections Sectors (%)
Elections 1996
Elections 1998
30/05/96
month
month
(election
post end
post end
period)
date
date
Oil and Gas
(2.9)
1.3
(8.7)
0.8
1.0
1.9
12.4
2.5
10.6
Pharmaceuticals
(6.5)
4.0
1.9
3.2
9.9
9.6
9.0
(8.7)
2.0
Banks
(7.9)
8.9
0.9
0.8
16.3
22.0
(2.8)
5.3
IT
(9.5)
(3.8)
(14.4)
8.3
22.4
84.4
33.1
0.1
3.6
0.9
(1.4)
1.5
33.1
46.4
(14.5)
Metals
(4.5)
1.8
(12.7)
(2.8)
17.9
30.9
(2.9)
E&C
(4.0)
4.7
(10.4)
2.5
19.8
20.2
(4.0)
Utilities
(2.7)
14.0
4.8
5.5
15.9
3.0
(9.0)
+1M
+2M
05/09/99-
+1M
ELECTIONS 2004
Till 1
Electrical equipment
Till 2 16/02/98 -
ELECTIONS 1999
27/04/96-
+2M 20/04/04 -
+1M
+2M
(5.1)
(20.3)
(24.2)
3.5
(6.9)
(10.6)
22.2
(1.3)
(18.0)
(23.9)
14.9
(4.3)
(0.5)
3.8
3.4
(3.0)
(1.4)
(19.8)
(11.4)
(1.4)
(5.2)
(7.8)
(10.0)
(6.0)
16.0
20.2
(4.2)
(18.5)
(14.2)
(8.0)
(0.5)
(5.1)
(27.9)
(24.1)
10/05/04
06/10/99
23/02/98
Autos
2.0
10.6
6.7
1.0
20.5
27.4
(13.5)
(1.0)
(3.0)
(3.2)
(9.5)
(5.7)
Realty
2.7
(2.6)
(19.5)
(2.9)
(2.9)
20.6
(22.0)
(3.1)
6.3
1.2
1.2
(6.1)
Telecom
(0.8)
(0.6)
(5.9)
3.1
4.4
8.9
5.4
26.2
64.4
(6.2)
(11.9)
(3.1)
Cement
(5.6)
2.8
(11.7)
3.1
11.0
24.6
(11.3)
16.4
8.1
2.2
(9.7)
(12.6)
Consumer staples
(5.1)
9.3
6.6
1.2
15.1
13.4
(0.4
(12.0)
(15.8)
(4.8)
(6.6)
(5.1)
Sensex
(1.7)
3.0
(5.7)
0.8
13.5
16.5
(0.3)
(2.1)
0.3
(4.3)
(10.7)
(11.0)
BSE100
(1.7)
3.0
(5.2)
1.2
14.7
18.6
4.2
(1.8)
4.9
(4.1)
(11.5)
(11.6)
Sources: Bloomberg; BNP Paribas estimates
We therefore recommend that investors overweight telecommunication, pharmaceuticals, and select automobile stocks during the elections. It is too early to take a call on the post-election scenario, but a “market-friendly” government should lead us to overweight banks, engineering and capital goods.
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DISCLAIMERS
&
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STRATEGY
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DISCLOSURES
This report was produced by a member company of the BNP Paribas Group (“Group”). This report is for the use of intended recipients only and may not be reproduced (in whole or in part) or delivered or transmitted to any other person without our prior written consent. By accepting this report, the recipient agrees to be bound by the terms and limitations set out herein. The information contained in this report has been obtained from public sources believed to be reliable and the opinions contained herein are expressions of belief based on such information. No representation or warranty, express or implied, is made that such information or opinions is accurate, complete or verified and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investments. Information and opinions contained in this report are published for reference of the recipients and are not to be relied upon as authoritative or without the recipient’s own independent verification or taken in substitution for the exercise of judgement by the recipient. All opinions contained herein constitute the views of the analyst(s) named in this report, they are subject to change without notice and are not intended to provide the sole basis of any evaluation of the subject securities and companies mentioned in this report. Any reference to past performance should not be taken as an indication of future performance. No member company of the Group accepts any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed herein. This report is prepared for professional investors and is being distributed in Hong Kong by BNP Paribas Securities (Asia) Limited to persons whose business involves the acquisition, disposal or holding of securities, whether as principal or agent. BNP Paribas Securities (Asia) Limited, a subsidiary of BNP Paribas, is regulated by the Securities and Futures Commission for the conduct of dealing in securities and advising on securities. This report is being distributed in the United Kingdom by BNP Paribas London Branch to persons who are not private customers as defined under U.K. securities regulations. BNP Paribas London Branch, a branch of BNP Paribas, is regulated by the Financial Services Authority for the conduct of its designated investment business in the U.K. This report is being distributed in the United States by BNP Paribas Securities (Asia) Limited and is intended for distribution in the United States only to “major institutional investors’ (as such term is defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Major institutional investors receiving this report should effect transactions in securities discussed in the report through BNP Paribas Securities Corp. BNP Paribas Securities Corp. is a member of the New York Stock Exchange, the National Association of Securities Dealers and the Securities Investor Protection Corporation. Reproduction, distribution or publication of this report in any other places or to persons to whom such distribution or publication is not permitted under the applicable laws or regulations of such places is strictly prohibited. Information on Taiwan listed stocks is distributed in Taiwan by BNP Paribas Securities (Taiwan) Co., Ltd. Distribution or publication of this report in any other places to persons which are not permitted under the applicable laws or regulations of such places is strictly prohibited. Recommendation structure
Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. *In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value. © 2009 BNP Paribas Group
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