Market Views: Outlook for India equities after shock election results
Stock markets in India pocketed gains on June 5 after a steep sell-off the day before in response to Indian voters handing Prime Minister Narendra Modi’s Bharatiya Janata party (BJP) a weakened mandate in the country's general elections.
The Nifty 50 index -- a widely tracked equities benchmark -- rose 2.6% after suffering a 5.9% drop the previous day. The BSE Sensex, another well-known benchmark, also bounced between losses and gains.
The final voting results also showed BJP set to lose its majority for the first time since 2014. The ruling party won 240 seats in India’s 543-seat Lok Sabha, or lower house, where it will remain the largest party.
Along with its coalition partners under the National Democratic Alliance (NDA), it picked up 292 seats, enough to cross the crucial majority mark of 272.
The coalition of anti-BJP opposition parties, known by its acronym INDIA and led by the formerly ruling Indian National Congress, performed better than expected and nearly doubled its tally to 234.
All of this means India will return to the era of coalition politics, marking a significant change from the past ten years.
The surprising election result puts the prime minister in a weakened position, raising questions about the government's ability to push through further economic reforms needed to facilitate growth in the world’s most populous country.
AsianInvestor asked the investment industry what the outlook for Indian stock markets is given a relatively more uncertain political environment.
The following responses have been edited for brevity and clarity.
Siddarth Bhamre, head of research
Asit C Mehta Investment Interrmediates
The BJP falling short of a complete majority won’t stop the NDA from forming a new government along with its key allies.
Stock markets have been expecting a complete majority for the BJP and a thumping victory for the NDA.
Exit polls too cemented the expectations. Markets had factored in the best possible outcome and stock valuations are rich.
However, the market is aware of the challenges associated with coalition government. Now with election results not being one-sided, we are witnessing profit booking.
We believe this profit booking may continue for some more time. Spaces like FMCG [fast-moving consumer goods] and IT may see less damage as defensive buying along with valuation comfort may keep them immune to this correction.
Though we expect some correction to continue in the market, it would not be fair to consider it as the end of the bull market. Most likely, this correction may turn out to be a hiccup in the long-term bull run.
James Thom, senior investment director of Asian equities
abrdn
India’s equity market experienced a sell-off across the board after the election result.
Volatility is likely to remain over the coming weeks as the BJP attempts to form a government.
A likely increase in risk perception could affect multiples near term and put pressure on the small-and-mid cap segment especially given some of the frothy valuations we have been seeing here.
It’s possible that a coalition government might lean towards more populist measures, which had been largely absent in the previous term.
Whilst we can debate the merits of this, it could be a tailwind for consumer stocks that have lagged in recent quarters.
Consumer staples names could see some re-rating, together with other sectors and stocks focused on mass market consumption.
In the longer term, India is still the world’s fastest-growing major economy, underpinned by a significant transformation in physical and digital infrastructure, a resilient macro backdrop and positive demographic dividends.
This top-down view remains attractive with a real estate boom, improving consumer sentiment, inflation at manageable levels, and a still robust infrastructure capex cycle as well as early signs of a private capex cycle revival.
Such inherent strength in the economy can be seen in the pace of nominal GDP growth and follow-through into robust earnings growth. We do not expect this to change materially.
Kunjal Gala, head of global emerging markets
Federated Hermes
So far it looks like investors are rotating from cyclical capex and policy driven businesses to stable and consumption-driven companies.
This rotation can balance overall market performance and hence be broadly neutral to slightly positive.
Overall, the market can correct if there are major disappointments after the government resumes – for instance, if the new coalition government policies disappoint, or if there is a risk of fiscal slippage.
So far, we do not expect material changes to the near term trajectory of government policies as BJP will still remain in the driver’s seat – but medium term, we are somewhat sceptical about reforming some of the complex areas such as the farm laws.
This can change investor perception and the premium assigned to the market for structural reforms might diminish.
Jean Chia
Global CIO, Bank of Singapore
We reiterate our neutral position on Indian equities within Asia ex-Japan.
Even considering the latest post-election dip in the MSCI India Index, we broadly see valuations to be fairly valued and likely to be range bound over the near term given the disappointing election results.
Within India, we favour domestic sectors and industries that could benefit from the BJP’s 2024 manifesto, which includes tourism, agriculture, housing, infrastructure, and manufacturing.
However, we remain wary that policy implementation could face some headwinds given the election outcome.
As at end May 2024, the MSCI India Index was up 8.9% year-to-date, and subsequently rose another 3.8% on June 3 on initial optimism of a strong mandate by Modi’s BJP party.
But further vote counts dampened such optimism after it was revealed that the BJP-led NDA alliance failed to win an outright majority in the elections, which resulted in the MSCI India Index and NSE Nifty 50 Index slumping 6.9% and 5.9%, respectively, on June 4.
In terms of valuation, the MSCI India Index is now fairly valued, trading at a 12-month forward consensus price-to-earnings (P/E) multiple of 21.5x (as of 4 June 2024), which is one standard deviation above its 10 year historical average of 19 times.
India is also trading at a heightened valuation premium against the MSCI Asia ex-Japan Index at 65% versus the historical 10-year average of 50%.
Vikas Pershad, portfolio manager of Asian Equities
M&G Investments
The election results led to significant market activity, with notable fluctuations within specific sectors. Despite this seeming volatility, the overall market appears to have absorbed the news effectively and remains stable for the week.
Historically, Indian markets have thrived even during periods of coalition governance, and this resilience is expected to continue.
The election outcome has underscored the economic divide between rural and urban India. Companies catering to rural consumers, such as those in the two-wheeler, staples, and low-priced food sectors, have shown strong performance.
Companies selling soap and low-priced snacks are also performing well. This indicates a market expectation that the new coalition government will focus more resources on rural development.
While sector-specific corrections may occur, the broader market remains robust. The depth and breadth of the market have significantly improved since previous election surprises in 2004 and 2009.
Ongoing reforms, despite potential timeline adjustments, are progressing in the right direction. For long-term investors, India's economic trajectory remains promising and constructive.
Recent sharp reactions in sectors like defence should be viewed in the context of substantial gains over the past 12 to 18 months. Such fluctuations are less concerning when considering the broader picture.
Ashish Chugh, portfolio manager and head of global emerging market equities
Loomis Sayles, affiliates of Natixis Investment Managers
We don’t think the election results change the India story, so we don’t expect a sharp correction.
There might be some volatility in the market as the coalition government gets formed, portfolios are assigned, and the budget is announced. As investors have been consistently concerned about valuations of Indian stocks, any corrections should be viewed as buying opportunities.
A clear majority win by the BJP would have led to a strong rally, in our view.
However, even with this election outcome, the BJP remains in power and Modi remains the leader of the country.
As investors, our team bets on the leaders of countries and companies, and their track records.
Strong leaders can navigate their countries and companies through changing times. Modi has certainly demonstrated that over the past decade, and we are confident he and BJP will continue to do so under these new circumstances.
We believe that the strong structural growth story of India remains intact even with this election outcome.
Over the long term, this growth story should drive consumption and investment in India, driving earnings and equity prices.
Our EM strategy has almost half of its exposure to India, and we will certainly look to increase it if there are corrections. We are not reducing our India exposure due to the election results.
Shekhar Sambhshivan, Indian equities investment director
Invesco
While the victory of Modi is narrower than expected, the NDA is still in majority. Therefore, we believe the ongoing economic reform and policies shall continue.
We anticipated policy continuity in India, as evidenced by Modi’s post-election speech. He reaffirmed the government's commitment to support the electronic manufacturing, semiconductor, defence, green energy, EV, and digitization sectors, coupled with efforts to make India the third-largest economy in the world.
We believe India is poised for a consumption explosion, supported by a rising population and growing GDP per capita. Domestic-oriented sectors like transportation, hotels, jewellery, and automotive are expected to benefit from the rising incomes of Indian consumers.
India's financial transformation, fuelled by increasing digitalization, presents significant growth opportunities for the country. We believe the continued advancement of India's digital financial infrastructure will pave the way for even greater growth within the financial services industry.
Fundamentally, India remains in good shape, with positive high-frequency data and an estimated GDP growth of 8.2% for FY24. We believe it is crucial to continue focusing on our bottom-up, fundamentals-driven stock selection approach, as this is much more important in the current market environment.
This story has been updated with additional comments.