400 plus for BJP or a truncated win? How to read the markets before the big verdict on June 4

Despite the plethora of election prophecies, opinion polls, surveys, diverse sample size, representative nature of the sample, psephologists and soothsayers, there is an inherent element of subjectivity about the imminent election results.

The uncertainty about the election results stems from the difficulty in getting it right in a nation of the size and complexity of India and currents and cross-currents of electoral politics. Further, a week is a long time in politics.  

This issue of risk averseness assumed significance with the Sensex falling by over 1,000 points on May 9, 2024 while the Nifty dived below the 22,000 level due to across-the-board selloff amid general election uncertainties caused by 66.9% voter turnout as against 69% turnout in the first four phases of the 2019 elections, heat waves, lingering Covid-19 effects, profit booking in some cases and capital gains tax concerns.

Foreign institutional investors sold about $4 billion from local stocks since early April till May 15, 2024 because of election volatility and uncertainty and the forthcoming final Union Budget. This is also reflected in surging net short positions, i.e.,  the difference between the number of index futures contracts on which global funds are long vis-à-vis short, to 213,224 contracts (i.e., widest chasm since 2012).

The decision of the US Federal Reserve to shelve rate cuts until year-end has led market participants to anticipate sustained impact on foreign inflows into Indian and emerging markets.

The market capitalisation (mcap) of BSE-listed companies eroded by Rs 7,34,513.48 crore to Rs 3,93,34,896.14 crore ($4.71 trillion).

There were also persistent foreign fund outflows and heavy selling pressure in HDFC Bank, Larsen & Toubro and Reliance Industries dampened investor sentiment.

Litmus Test

A seemingly certain BJP victory stems from committed cadre, beneficiary-centered programmes, disjointed opposition, fragile index of opposition unity and the TINA (there is no alternative) factor. Accordingly, a BJP victory is given reflected, inter-alia, in JP Morgan’s inclusion of India in its Global EM Bond Index and subsequently Bloomberg’s inclusion of India in its EM Local Currency Government indices. Hence, the BJP will romp home comfortably. The only issue here seems to be the margin of victory.

My sense is that a BJP victory and consequential continuity and stability in policy and programmes are likely. Post-elections, economic reforms will gain momentum.

Conundrum of Scenario Modeling

Gazing into the crystal ball and predicting the likely shape of the electoral outcome is fraught with challenges. Election outcomes assessments vary from outright BJP victory to coalition governments.

Should the BJP garner 400 seats, there will be macro-economic dynamism, a spring in the step leading to accelerated reforms (e.g., land, labour and agriculture) and the message to domestic and global audiences about the continuity in the policy and operational frame would go out loud and clear. This   would salubriously impact sectors, such as, financials, consumer discretionary, industrials/infrastructure and PSUs. IT services and healthcare may underperform.

If the BJP-led NDA Alliance finishes with 290-320 seats, which is well over the magic 272 number, there would be business as usual or a more of the same approach. Frothy sectors like industrials, infrastructure, PSUs could correct while banking, consumption, and pharmaceuticals could buck the trend.

However, in the extremely unlikely event of a fractured mandate, the markets could fall steeply by 2-3 % immediately and up to 10 % in a few days because of depressed market sentiment and investor behavior.

In such a lackadaisical macroeconomic scenario of gloom and doom, strategically significant sectors like infrastructure, manufacturing, BFSI, consumer discretionary, PSUs “military-industrial complex”, space technology, logistics, fintech and artificial intelligence (AI) could take the greatest hit with consumer staples, IT services and pharmaceuticals outperforming. With accent on consumption and lower income, fiscal prudence will be unmaintainable and some flagship programmes like PLI schemes could be axed.

Pathway to the Future

With economic globalization gaining steam, India, which is the world’s fifth largest economy (also the fastest growing major economy) would continue to be an important investment destination over the long haul and, therefore, despite occasional dips, the growth saga of both the Indian economy and the stock market would continue.

There are, however, some valuation concerns with the present valuations being 20 times one-year forward earnings. Such earnings are more than one standard deviation above the long-term average, both in absolute terms and relative to emerging markets. However, the trajectory of earnings revisions remains relatively stable and is trending better than the long-term average.

While the poll-related market volatility and investor anxiety of India’s momentous election could persist, we see limited market volatility in the run up to the elections unless there is a game-changing development either globally or domestically in twenty days for the election results.

Contained concentration risk requires investors refraining from putting all their eggs in one basket and

cautious investors diversifying their portfolios to mitigate election volatility risks.

Dr. Manoranjan Sharma is the Chief Economist of Infomerics Ratings