India’s election results have surprised everyone, unleashing a week of volatile swings in one of the world’s most expensive and most-watched stock markets.
Indian equities hit an all-time high on Monday 3 June in anticipation of Narendra Modi’s Bharatiya Janata Party (BJP) achieving a majority. The stock market then plummeted as results from the early vote count rolled in. A coalition government now appears the most likely outcome.
Peeyush Mittal, who manages Matthews Asia’s India strategy, expects “volatility to continue as the next government takes shape”.
The new coalition government is likely to introduce more populist policies to drive consumption but will probably hit pause on infrastructure spending, which had been a priority for Modi, Mittal said. As a result, he expects sectoral leadership in the stock market to change in favour of consumption stocks, away from capex-led themes.
“We think capital goods and infrastructure-related sectors spanning industrials and materials will face headwinds in the near term and associated stocks will likely be negatively impacted. There are grey areas, such as power and defence, which should be less affected as these are less sensitive to partisan issues,” he said.
“But it will be consumption-related sectors like consumer staples, traditionally strong areas like pharmaceuticals, and other areas that may be more favourably looked upon by an evolving coalition that could fare the best in the coming weeks.”
Mittal pointed out that consumption growth has been weak in India despite strong GDP expansion during the past two years, which he said indicates there are not enough employment opportunities for lower income groups.
“Post-Covid, the economic recovery in India has been K-shaped, with some sectors and socio-economic groups bouncing back while others have struggled and experienced a loss of savings, particularly citizens on lower incomes and those in rural areas,” he said.
He thinks consumption growth needs to improve for GDP growth to be sustainable.
Mittal also warned that small and mid-cap stocks are likely to experience prolonged volatility given their elevated valuations.
Amol Gogate, manager of Carmignac Portfolio Emerging Discovery, was more bullish about India’s prospects, even though managing a coalition could slow down the government’s pace of execution.
“While the election results are certainly a dampener for the markets and sentiment in the short term, they also showcase that India is a true democracy. And with Modi at the helm, it seems likely the next phase of economic development will proceed and the long-term investment case for India, for now, remains solid,” he said.
Investment into India’s bond markets is set to spike as a result of India’s inclusion in JP Morgan’s emerging markets government bond index this month and Bloomberg’s emerging market local currency index in September 2024. These events could bring in up to $40bn of foreign investment, which Gogate thinks will have a ‘halo’ effect on Indian equity markets as international investors become more familiar with the country.
“This capital boost, combined with Modi’s pro-business stance and a well-managed domestic financial system means Indian markets are poised to continue their upward march. However, with valuations already high, and a less certain political landscape, volatility may increase, so selectivity is becoming more important,” he explained.
His outlook for the stock market differs from Mittal’s. “In our view, small and mid-cap firms will benefit from a likely capex upcycle, as well as the financial services, high-end manufacturing and real estate sectors. The most disruptive businesses, with the highest potential for rapid growth will emerge on top thanks to a highly supportive ecosystem for budding companies,” Gogate said.