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Bank of America Merrill Lynch Research Report: Delhi Assembly Elections - Does it Matter to Markets?

Feb 05, 2015   10:03 IST 

Opinion polls suggest a tough fight in Delhi Assembly election

The National Capital Territory (NCT) of Delhi is scheduled to undergo assembly elections on 7th February (Results to be announced on 10th Feb). The opinion polls for the upcoming assembly elections suggest a close fight between BJP and AAP with slight edge to the AAP. Over the last one week, 6 opinion polls by media have been published, some of the key points are as follows:

  • AAP seems to be the front runner with 4 of the 6 surveys giving it a higher number of seats. The range of seats for AAP is between 28 and 46 seats.

  • BJP on the other hand has emerged as a front-runner in 2 of the 6 opinion polls. The range of seats for BJP is between 19 and 37 seats.

  • Congress is expected to be a distant 3rd in these polls and win between 2 and 7 seats.


This could be a slight negative for BJP

Politically, Delhi has very little weight accounting for only seven seats out 543 Lok Sabha seats. However by virtue of being the national capital it generates a disproportionate amount of news-flow. In the past assembly elections held in Dec’2013, Bhartiya Janta Party (BJP)- the ruling party at the center, though the largest single party was just short of majority at 32 seats (of 70 seats). Aam Admi Party (AAP) had formed the government with the support of the Congress party which lasted for 49 days. In the subsequent general elections, BJP won all the 7 Lok Sabha seats. An adverse showing in the Delhi polls would indicate a slowing of the momentum from the May Lok Sabha elections and the subsequent assembly polls.


What would a BJP loss mean for markets?

1. While an outcome in the Delhi assembly elections doesn’t impact the central government led by Mr. Modi, we think the market would be concerned whether the election result is a local issue (as state elections generally are) or whether it indicates some loss of popularity for the ruling BJP.

2. We do not think it will change the course of the reform agenda in India.

3. We think the market is likely to see a correction of around 5% over next 2 months on account of supply of paper, rich valuations and weak earnings. A loss in Delhi polls for the BJP could further provide an excuse for the correction. We think these corrections are tactical and reiterate our yearend Sensex target of 33,000.


“Buy the dips”; prefer rate sensitive domestic cyclicals

Our sector strategy is still overweight rate sensitives, operating leverage plays (we overweight autos, banks, cement and oil as a reform play). We also overweight pharma to leverage a tactical consolidation in the market


Model Portfolio Methodology

The BofAML India Model Portfolio is a sector weighted portfolio benchmarked against the MSCI index that is constructed to reflect the general themes promoted by the BofAML India Strategy team at the time. We consider for inclusion in the portfolio only stocks that i) are rated by BofAML, whether they are part of the MSCI or not, and ii) where the company has a market capitalization [on Bombay Stock Exchange / National Stock Exchange] of no less than US$1 billion (or its equivalent in Indian Rupees). The portfolio is an actively managed portfolio with the objective of out-performing its benchmark and hence will continue to search for stocks that can generate the best alpha amongst the BofAML coverage universe.


The portfolio may contain from 15 to 25 stocks though it will typically comprise around 20 stocks at any given time. It is our intention to publish the contents of the portfolio at least once a quarter. We may publish more frequently if we determine that material developments warrant an immediate change in the contents of the portfolio. We also look to rebalance the portfolio quarterly to reflect changes in the MSCI weight for either stock price movements or changes to weights by MSCI. We may, adjust our portfolio weights to reflect these changes.


The portfolio will be constructed with the objective to outperform the MSCI index over the 12 months following publication, though no measure of the performance of the portfolio will be published.


We take a top-down approach in our portfolio, taking into account macro and sector themes, and this is supplemented by our bottom-up stock selection. It may also take into account by individual stock performances. Each stock will be assigned a weight upon inclusion in the portfolio and will remain in the portfolio until its removal at the discretion of the India Strategy team or otherwise. Relative weightings of stocks comprising the portfolio may be adjusted at the discretion of the India Strategy team, including to account for rating changes by BofAML fundamental analysts. Stocks will also be removed from the portfolio when a fundamental analyst departs and coverage is not expected to resume within a reasonable time frame. In general, we continue to retain in the portfolio stocks that become restricted without any change in their weight. We may include Underperform rated stocks in the portfolio in circumstances where such stocks have a significant weight in the MSCI Index and/or if BofAML does not have Buyrated eligible stocks in that sector.


Analyst Certification

I, Jyotivardhan Jaipuria, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.


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