NEW DELHI: A shift in Uttar Pradesh (UP) politics is raising the possibility of an unstable government at the Centre after the forthcoming general elections. This, along with the recent defeat for BJP in recent state elections may start building pressure on domestic and foreign flows, say brokerages.
Prabhudas Lilladher, which has a cautious view on the market, says the probability of a hung Parliament with weak alliance partners and a Third Front-led government is rising with each passing day. Calendar 2019 will be a significant game changer for Indian politics, as both principal national parties i.e BJP and Congress, do not seem to be even close to forming a government,” it said.
UP is a key state, accounting for 80 of 543 Lok Sabha seats. The recent SP-BSP alliance has raised concerns over its impact on the final outcome. A pre-poll alliance between Bahujan Samaj Party (BSP) and SP will pose a strong challenge to BJP, Kotak Institutional Equities said, noting that the two parties have fairly dedicated and separate voter bases.
We carried out hypothetical exercise for UP based on votes for major parties in the 2014 general elections. We clubbed the votes of BSP and SP together in each Lok Sabha constituency to re-compute vote shares for each party and ‘alliance’. The exercise showed BJP’s seats decline by about 35 or 50 per cent. We saw a similar ‘outcome’ based on vote shares of the BJP and BSP + SP in the 2017 state assembly elections,” the brokerage said.
It sees more trouble for the Congress in reaching 140-150 seats and forming an INC-led UPA government. “We find it implausible for INC to cross 140-150 seats, which we believe would be necessary for an INC-led UPA-III government,” it said. The Rahul Gandhi-led party already appears to be sensing this. The Congress party last week appointed a charismatic and politically-savvy Priyanka Gandhi in charge of Eastern UP and handpicked youth leader Jyotiraditya Scindia to strengthen the party in western UP.
Brokerage CLSA said while election outcomes are never easy to predict, rising political uncertainties will likely keep the downward pressure on domestic and foreign inflows, potentially leading to a derating of the market ahead of the elections. The recent loss for BJP in the state elections and the formal announcement of seat-sharing agreement between SP and BSP in the politically important state of Uttar Pradesh have raised investor concerns on a possible unstable government post the 2019 elections. These concerns haven’t yet translated into portfolio actions,” it said.
Opinion polls by India Today-Karvy and ABP-C-Voter over the past fortnight suggested that the NDA may to get 230-240 seats in the forthcoming elections, short of the 272 seats needed for an absolute majority. The gap between the NDA and UPA has become the closest since the 2014 elections.CLSA said a 5 per cent decline in BJP votes and 100 per cent SP-BSP consolidation could lead to up to a 50-seat loss for the BJP, which will be the worst-case scenario, it said. Prabhudas Lilladher expects range-bound trading ahead of the elections and says Nifty50 has support at 10,000. On Monday, the index traded 1.02 per cent lower at 10,670.
Nifty50 is trading at 18.7 times FY20 earnings, which is still at a premium to long-term average of 17.3 times. This is after factoring in a 19.3 per cent PAT growth for FY20 against 5.8 per cent CAGR in last 10 years.We retain a cautious view on market in H1CY19, given the headwinds like political uncertainty in the run-up to the 2019 elections, rising rural distress given low agricultural prices and drought in parts of Maharashtra, Karnataka and Gujarat, GST shortfall and delay in the much-awaited capex cycle,” Prabhudas Lilladher said.