Will The Bull Run Continue In Modi 3.0?

Every five years, the politics of India sways the stock market of the country, as the nation goes to the polls. Investors usually take this opportunity to evaluate how the outcome will have a bearing on their portfolios. In that respect, the most anticipated event of recent months is now firmly behind us as the election results are out.

The people have given their mandate in favour of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) for the third consecutive term. However, unlike the past two terms, where the BJP had secured a majority on its own, this time the situation is different.

BJP could not reach the majority mark of 272 seats in Lok Sabha on its own. The NDA secured a total of 291 seats, with the BJP winning just 240 seats against 303 in the previous election. The fall in the number of seats that BJP secured was  against market expectations.

The Initial Jolt

On June 1, 2024, most pollsters had predicted a strong win for the BJP-led NDA in the 2024 general elections. On the back of this prediction, on June 3, the major Indian stock market indices, the BSE Sensex and Nifty, scaled new highs. The Sensex touched 76,468 points, while the Nifty was at 23,263, up by 3.30 per cent and 3.25 per cent, respectively. That day, the Sensex closed above the 76,000-mark for the first time in its history.

The very next day, though, on June 4, the day the results were announced, the situation changed dramatically.

As the result trends began to trickle in, the stock market started to crumble, and by the end of the day, both the Sensex and the Nifty had fallen by around 6 per cent.

The fall was much sharper in the mid- and small-cap indices, which fell by as much as 8-9 per cent. The sectoral indices, such as Nifty PSU Bank and Nifty Oil & Gas shaved off 15 and 12 per cent, respectively.

The stock market reacted unfavorably to this mandate. It initially anticipated the BJP would not be able to form a stable government and will be constrained by the dynamics of coalition politics when it came to implementing key reforms and policy decisions; in this case, the demands of its two major regional allies, the Telugu Desam Party (TDP) and the Janata Dal (United).

Coalition Vs Continuity

Things started improving after the NDA meeting on June 5, when the alliance elected Narendra Modi as its leader. This boosted market sentiments, initiating an upward trend.

Further, portfolio allocation reassured the market of policy continuity, as 61 out of the 72 ministers were from the BJP and 11 were from the NDA allies. This clearly reflected the dominance of the BJP in the alliance. Moreover, some key ministries retained previous cabinet ministers, including finance, indicating continuity. Says Pankaj Pandey, head-research, ICICI Securities: “While this is a coalition government, it is a stronger coalition unlike in the past. Also, the fact that the government is retaining most of the key portfolios, gives a clear indication of policy continuity.”

Other analysts agree. “We believe that the distribution of portfolios displays continuity at its best and equitable treatment of allies, which is a big plus,” writes an analyst at Philip Capital in its recent report titled Modi 3.0 Continuity And Balance.

The election of 2024 has been viewed largely as one of the most important in the history of India. After a long gap of 10 years, a coalition government is back in power. Before 2014, India has had a history of coalition governments for 30 years.

But this time, the coalition structure is different, given the fewer number of allies, and the major party, the BJP, short of just 32 seats. This means the government may be able to ensure continuity with the help of independent candidates even if few of the allies decide to withdraw their support later.

Just like the markets, which have resumed the bull run, experts see this majority mandate towards the NDA coalition led by Narendra Modi in an extremely positive light.

Says Gautam Duggad, head of research, Motilal Oswal Institutional Equities: “Despite the reduced majority, we expect the policy agenda of Modi 2.0 (investment-led growth, capex, creation of infrastructure, manufacturing, and so on) to continue, though with some tweaks. We also expect some populist measures to address rural stress and lift sentiments at the margins.”

The new government is expected to bring back the focus on economic growth. However, clarity will emerge only after the new government presents its first Budget in July 2024.

“After the election verdict, we believe that the market would be driven by clarity over the economic agenda in the third term. The earliest indicator could be from the first Budget that is likely to lay down the five-year road map of the government,” says Krishna Sanghvi, chief investment officer-equity, Mahindra Manulife Mutual Fund.

Will The Bull Run Continue?

Many investors are now wondering if the market will continue its exceptional performance. However, the answer to this question is a
bit complex.

While electoral verdicts can influence market sentiments in the short term, the long-term market direction depends on fundamentals and policies. Therefore, investors should focus on economic indicators, corporate earnings, and policy continuity rather than short-term political outcomes. Ultimately, sound governance and robust economic policies will play a crucial role in sustaining market growth and stability over a period of time. Thus, while political changes matter, the underlying economic and policy environment is what truly drives market performance in the long run.

India’s coalition governments have their own success and failure stories but the long-term performance has been positive. During 1996-1999, a fragmented coalition with differing economic ideologies was widely considered as the key reason behind the economic malaise. At the same time, major reforms have happened under coalition governments. For instance, in 1991, the mother of all reforms—globalisation and liberalisation of the Indian economy—happened during the tenure of Prime Minister P.V. Narasimha Rao. It was a coalition government, and the major party, Congress, held only 232 seats.

Experts believe that the new government will be in a position to take some tough decisions that will boost the market sentiment.

“The most important aspect of the BJP-led NDA retaining its majority is policy predictability—something equities tend to thrive on,” writes Ridham Desai, chief equity strategist, Morgan Stanley, in his report, Modi 3.0: This Remains India’s Decade. He further writes that share prices have yet to take in a number of positives, such as India’s new-found macro stability, a likely fall in the primary deficit, a growing domestic equity savings pool, improving social equity, a fast-evolving deep tech sector, an impending loan boom, and shifts in external dynamics.

The Indian equity market has also acknowledged this sentiment. The BSE Sensex touched a new high of 77,478 on June 20, 2024. The indices are scaling with each passing day. The BSE Sensex is up by 8.28 per cent in the last 14 trading session after the declaration of results. As we go to press, the Sensex is at a historical high of 78,053.52 on June 25, 2024.

Windows Of Opportunity

At present, the market valuation is on the higher side, but experts believe areas of opportunity will open up.

Experts say that the new government is likely to place higher thrust on capex-driven sectors. “The prospects for the India capex cycle led-economic growth in manufacturing activities is one of the aims for policymakers via product-linked incentives and the Atmanirbhar Bharat Initiative,” says Sanghvi.

Pandey agrees: “In the long term, the capex-oriented theme will continue to do well. However, my sense is that in the medium term, bank and cement will offer a good risk-reward.”

The one sector on which most analysts have put their bets on is consumption, as they believe that the government may make some major announcements to boost demand. Morgan Stanley is positive on consumption, financials, energy transition and industrials.

“The next five years are likely to bring a major rise in corporate capex, leading to strong order books for industrial companies. New investment areas, such as energy, mobility, defense, railways, electronics, and semiconductors are indeed attractive,” Desai writes.

Some analysts believe that IT would attract inflows from investors as it is largely insulated from the domestic uncertainties, and can also offer diversification to their portfolios.

What To Look Out For?

The new government will present the Budget in another 15-20 days.

“As the Budget will give a policy roadmap of the new government, the market will watch out for it,” says Pandey. In effect, the Budget will give a roadmap of the new government’s strategy on managing fiscal deficit, borrowing, and disinvestments, among others. It will also be important from the interest rate point of view, as the Budget announcements will have an impact on the interest rate direction that the Reserve Bank of India will take, which in turn may affect the short-term market direction.

kundan@outlookindia.com