Swiss-headquartered UBS, a global wealth management major, suggests that any significant weakness in Indian equities post-election results on June 4 could present “buy-on-dip” opportunities for investors. On the fixed income side, medium-to-long duration bonds are in a “sweet spot” and could become even more attractive if bond yields spike due to certain election outcomes, UBS noted in its latest India Market Outlook.

The research document, released on Friday by UBS’s Global Wealth Management’s Chief Investment Office, discusses 2024 election scenarios and market implications.

UBS highlighted that markets are already pricing in a scenario, based on opinion polls, where the Bharatiya Janata Party (BJP) retains a single-party majority. This anticipated political stability should ensure policy continuity, supporting market sentiment and India’s valuation premium.

“If the election plays out as expected, we anticipate policy continuity, macroeconomic stability and the potential for further structural reforms, all of which could positively influence Indian financial markets,” said Premal Kamdar, Analyst at UBS Securities India and author of the research note. Any unexpected outcome could be perceived negatively at first due to political instability and possible policy paralysis, which might weigh on business sentiment and impact investor confidence.

Knee-jerk reaction

Such an unexpected outcome could trigger knee-jerk reactions in financial markets in the near term, with equity valuations possibly testing pre-NDA levels, Kamdar added. However, UBS highlighted that historically, any market underperformance triggered by election results tends to reverse in the medium to long term as markets and businesses adapt to new government policies.

“Despite the potential for near-term election-driven uncertainty, we reiterate our view that any sharp weakness in equities could offer buying opportunities,” UBS’s research note said.

In the lead-up to the 2024 general elections, the consensus opinion was for the NDA (National Democratic Alliance) government under the leadership of Narendra Modi to secure a third term with a big majority. Based on these opinion polls, Prime Minister Modi remains the most popular leader in India, UBS research note said.

Lower voter participation

The research note also highlighted that while opinion polls suggested further seat gains for the BJP, actual progress in the first five phases of the election has been less clear. Lower voter participation so far and possible loss of voter share in key States like Maharashtra, West Bengal, Karnataka and Bihar due to regional political uncertainty have raised questions about the NDA’s ability to secure a third term.

Although the link between voter turnout and election outcomes is not straightforward, the drop in voter turnout has introduced an element of uncertainty that has reverberated through financial markets. While the intensity of the impact on financial markets could vary depending on the election outcome, past instances suggest that the significance of election results diminishes over the medium to long term, UBS has said.