Brokerages damn opinion polls, but bet big on Modi

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Say stability, not exuberance, good for investors

Brokerages damn opinion polls, but bet big on Modi
Most foreign brokerages see a strong possibility that the national elections will throw up a Narendra Modi-led stable government at the centre, but have cautioned investors about the pitfalls of relying too much on opinion polls.

Projections made in opinion polls went terribly wrong in the last two national elections in 2004 and 2009.

UBS Securities and Standard Chartered Bank said investors should not rely too much on the opinion polls, but Japanese brokerage Nomura said there was a 75 per cent chance that the BJP-led NDA would win a clear majority in these elections.

UBS Securities India in a strategy report titled ‘Politics – Decoding Opinion Polls’ cautioned investors, saying,“Unpredictability of election outcomes in India remains an overhang, given the fragmented polity and dynamic voter base, coupled with the fact that opinion polls went wrong in the last two national elections (2004, 2009).”

In 2009, 37 per cent of seats were won with less than 5 per cent margins, it pointed out.

“In both 2004 and 2009, the opinion polls overestimated vote share for BJP by 3-4 per cent and underestimated that for the third front. Vote share prediction for the Congress was not that off the mark, though the seats projections were,” UBS Securities said.

UBS Securities analysts Gautam Chhaochharia and Sanjena Dadawala said their discussions with investors suggested that the polls had aided expectations around increased probability of a Modi/BJP-led government.

Standard Chartered’s global research report titled ‘India – Hope builds, but delivery will be key’ said a stable and cohesive government would be an investor-friendly outcome.

However, opinion polls were not accurate predictors of India’s previous two elections, and there is a risk that the NDA will have to seek more regional parties to form a government. This could dilute the NDA’s economic agenda, the brokerage said.

Standard Chartered analysts Anubhuti Sahay and Samiran Chakraborty said, “The market is likely to react positively if a stable government is elected, but might already be partly pricing in a positive outcome based on the opinion polls.”

In the past, India’s equity market reacted strongly to unexpected election outcomes, while the currency market’s reaction was muted, the analysts said.

However, they saw many similarities between the economic ideologies of the UPA and the NDA. “The UPA is marginally left of centre and the NDA leans a bit to the right. This should ensure broad continuity in the policy framework, but implementing reforms and removing bottlenecks will be crucial to reviving the economy,” the Standard Chartered analysts said.

Nomura’s Asia Special Report titled ‘India’s defining moment’ said there was a 75 per cent probability that the BJP-led National Democratic Alliance would secure a ‘solid enough’ plurality to pull together a majority coalition under the leadership of Narendra Modi.

“We see this outcome as a medium-term positive for the economy, as it should accelerate economic reforms and, coupled with continued prudent monetary policy, set the stage for a steady improvement in India’s macroeconomic fundamentals,” Nomura India economists Sonal Verma and Aman Mohunta said.

Nomura’s India equity strategist Prabhat Awasthi said an NDA win would lead to a further positive knee-jerk reaction in the market.

”A sustained rally in growth cyclicals will be hard, but we expect rate cyclicals to benefit. We expect 5-10 per cent upside to our December 2014 Sensex target of 24,700 in the case of a strong election outcome,” he said.

The UBS Securities analysts felt the current Nifty valuations at 14 times one-year forward PE implied that a positive election outcome might not yet be priced in. “This is also supported by valuation premium over emerging markets and the defensive-cyclical valuation gap,” they said.

“In our view, a more euphoric sentiment among investors could imply higher multiples. Nifty at 6,900 would be a possibility if the market starts believing in a positive election outcome based on 15 times one-year forward PE and 15 per cent earnings growth in FY15,” the analysts said.

Other global financial services majors like Bank of America Merrill Lynch, Barclays, CLSA, BNP Paribas, RBS, Deutsche Bank, Credit Suisse, Morgan Stanley and JP Morgan have also come out with similar reports, projecting Modi as a clear frontrunner in these elections and describing him as more business-friendly.

Giving a thumbs-up to the Gujarat business model, a Goldman Sachs study has earlier said 40 million new manufacturing jobs can be created in a decade if states follow flexible labour laws like in Gujarat. In November 2013, Goldman Sachs had came under sharp attack from government and the Congress over upgrading Indian markets on a likely election victory for Modi.


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