Unstable coalition in 2019 may hurt market valuations, says report2 min read . Updated: 03 Jul 2018, 10:08 PM IST
There are rising concerns among investors about an unstable coalition government coming to power in May 2019, according to Nomura
Mumbai: Next year’s general election is likely to influence market sentiments through mid-2019, financial services firm Nomura said, adding if the Bharatiya Janata Party (BJP) loses and an unstable coalition comes to power, it would hurt market valuations.
Expecting the equity markets to remain volatile in the run-up to the election, analysts at Nomura said they are positive on earnings growth on the low base of FY18, but cautious on valuations as adverse macro conditions along with political uncertainty may limit valuation upside in the near term. Nomura projects Nifty earnings compound annual growth rate (CAGR) of 24% over FY18-20.
“The gap between 10-year government bond yields and earnings yield has expanded and is close to the lowest level since September 2014, indicating relative overvaluation," the Japanese company said in a report on 3 July, authored by Saion Mukherjee, Neelotpal Sahu and Sanjay Kadam.
It expects Nifty’s 12-month forward price to earnings (PE) multiple estimates at 17.5 times and sees Nifty hitting 11,380 based on a forward multiple of 16 times December 2018 earnings.
“Alternately, failure of the incumbent government to come to power implies formation of an unstable coalition government. This could adversely impact the implementation of policy reforms and important policy decision making initiated by the incumbent government, which could hurt market sentiment thereby limiting valuation multiples," Nomura said.
So far this year, Nifty has risen 1.68% while MSCI World index has slipped 1%. Valuation-wise, India is still one of the most expensive markets compared to peers. One year forward PE of Nifty stands at 17.24, while that of MSCI World is at 15.13. At the same time, missing earnings growth has led to cuts in earnings estimates. According to Bloomberg data, from beginning of this fiscal earnings per share estimates for Nifty has been cut by 1.5% for FY19 and by 1% for next year.
According to Nomura, there are rising concerns among investors about an unstable coalition government coming to power in May 2019.
Increasing instances of opposition unity against the BJP/National Democratic Alliance (NDA), some large alliance partners leaving the NDA in the recent past and recent losses for the BJP in the by-elections have led to these concerns.
It said political developments, particularly key state elections, are crucial for markets as global macroeconomic conditions have somewhat worsened: interest rates are rising and there are fears of liquidity tightening globally. Besides, crude prices are rising, hurting current account deficit while inflation is inching up with even core inflation above 5% for the last five months. In 2018 so far, rupee has slipped 7% while crude prices have gained 16.46%.
However, Nomura feels that if the incumbent government returns to power, it would ensure policy continuity and that should help sustain market multiples.
Nomura said what is certain is the government’s focus on expediting implementation of schemes targeting the rural and poorer sections of society and addressing the agricultural distress. “Though the political outcome remains uncertain, there is absolute certainty on the government’s focus on the rural and agricultural economy in the run-up to the general elections. The incumbent government has undertaken several developmental reforms to benefit people at the bottom of the income pyramid. Execution of the schemes in India’s hinterland will have a positive impact on the rural economy in the near and medium term, in our view," it added.