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Cover Feature

Published on: April 24, 2024, 3:19 p.m.
Indian elections and markets
  • What matters to the market is the current valuation and the potential for future growth

By Daksesh Parikh. Executive Editor, Business India

Indian investors who will cast their votes over the next few days constitute only a small subset of the estimated 97-crore electorate of India. While investors are considered to be somewhat more astute, they largely represent the same demographic within the electorate. They also tend to share many similarities. One significant trait is that both groups think logically but ultimately act based on emotion. Sentiments play a significant role in shaping their actions and determining the overall outcome.

In the current elections, the outcome seems to have been almost predetermined, although it is not truly decided until the final vote is counted! However, sentiments are running so high that the market entered a state of euphoria long before the election timetable was declared. The BSE Sensex reached an all-time intraday high of 75,000 on 9 April and closed above this level on the following day, 10 April.

While subsequent events leading to increased tension in West Asia affected sentiments, it was the fear of escalating conflict between Iran and Israel that unnerved a section of the market. Although markets generally dislike uncertainties, the overall sentiment remains bullish.

“Election results are more or less already factored in,” says Asit Mehta, a veteran stockbroker. “What was surprising was the sudden escalation of tensions in West Asia. The Indian rupee has already depreciated, anticipating further escalation. Oil prices are on the rise. We are currently witnessing a flight to safety, with several globally traded assets increasing in value, including equities, gold, silver, commodities such as copper and crude oil, and the US dollar. Perhaps investors are privy to more information than what is publicly available.”

It is a rare but not unheard-of phenomenon when all asset classes move up in synch. While the magnitude may vary, the direction remains consistent. This has occurred in recent times, notably in 2012, 2018, and 2019 in India (see box). The reasons behind such movements differ, ranging from global markets flooded with liquidity to excessive euphoria or a crisis.

Investor sentiment and election outcome

Many investors in the market believe that the tensions in the Middle East may not escalate into full-fledged, open war. They are hopeful that mediators from both sides will succeed in deescalating the imminent warlike conditions between Iran and Israel.

The markets appear to have already factored in Narendra Modi and his team winning the elections this time around, marking their third consecutive victory. The question for investors is not so much about who will win, but rather, how many seats the Bharatiya Janata Party (BJP) will secure. The leaders’ concern is whether sentiment will sour if the BJP-led NDA (National Democratic Alliance) falls short of the much-touted 400 Lok Sabha seats out of the total 543.

While the world won’t come to an end, investor sentiment will certainly be impacted if the total seats won by the BJP are below 350, especially considering that the NDA secured 353 seats in 2019. Of course, 2019 was unique, with the highest voter turnout at 67 per cent and 900 million voters casting their ballots. The question remains whether voters will turn out in large numbers once again or if complacency will set in, resulting in fewer voters making the extra effort to support their preferred party.

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    Elections results are more or less discounted. What came as a surprise was the sudden escalation of tensions in West Asia. India rupee has already depreciated fearing a further escalation

    ASIT MEHTA, A veteran share broker

Foreign Institutional Investors (FIIs) have opted to play it safe and refrain from attempting to predict the actions of Indian voters. In the first fortnight of April 2024, FIIs have been net sellers, amounting to over Rs10,000 crore. While this might have sparked concern in previous years, that is no longer the case. Domestic investors, whose numbers are steadily increasing, continue to remain committed. Mutual funds have emerged as net buyers, investing nearly Rs90,000 crore in the secondary markets over the first 3 months.

These funds are well-funded with investments from both direct investments and Systematic Investment Plans (SIPs). The total contribution of investors through monthly SIPs in 2023-24 has reached close to Rs2 lakh crore. Month by month, the average amounts invested through SIPs have been steadily increasing. In March, this was just shy of Rs20,000 crore.

Based on this trend, the total amount invested through SIPs alone is projected to surpass the amount brought in by FIIs. FIIs have only exceeded Rs2 lakh crore in investments twice in the last 8 years. In other words, the collective sentiments of domestic investors will, to some extent, outweigh those of FIIs in determining market trends.

It might be wishful thinking to expect mutual funds (MFs) to completely supplant Foreign Institutional Investors (FIIs) in determining market trends in the near future. Even if Indian investors don’t entirely take the lead, they will still collectively exert bullish influence alongside the exiting FIIs. “Sentiments of investors will remain bullish,” affirms Deven Choksey, MD of DR Choksey Finserv Private Limited.

“Elections typically bode well for the market,” adds Jyoti Jaipuria, founder and MD of Valentis Advisors Pvt Ltd, a Mumbai-based PMS company, while noting that “the economy is on solid ground.” There is widespread agreement that the Indian economy is on a positive trajectory. Reserve Bank of India (RBI) Governor Shaktikanta Das has forecast a GDP growth rate of around 7.6 per cent for FY24, with the possibility of nearing 8 per cent. He also anticipates a growth rate of 7 per cent for FY25.

Markets often move in anticipation of positive news, which is one of the reasons why they delivered the extremely good returns of over 25 per cent for the year ending March 2024. Corporate earnings also performed exceptionally well, and coupled with strong inflows from both Foreign Institutional Investors and domestic institutions, investors reaped substantial gains across large caps, midcaps, and small caps.

In fact, both midcap and small caps yielded returns exceeding 60 per cent. However, questions arise about whether they ventured into the overbought territory. Considering the price-to-earnings (P/E) ratio as a reliable indicator, small caps were slightly lower at 28.8, whereas midcaps stood at 25.1 compared to 23.8 previously (see table).

Will the markets be able to give such stellar returns again in 2025? It is true that the economy is robust and will continue to remain robust. What is an issue is that the base in March was already high. Can investors expect to have the same returns on this heightened base? When the markets touched 75000 in the first fortnight, there was an euphoric outburst with people forecasting 85000 by the year end and 150000 over the next few years. While there is no limit on the aspirations or dream of investors, experts feel otherwise.

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    The current valuations are priced to perfection and have discounted FY26 earnings. This could probably see correction in prices

    DEVEN CHOKSEY MD, DR Choksey Finserv Private Limited

Perfectly priced

What matters to the market is the current valuation and the potential for future growth. Deven Choksey asserts: “The current valuations are priced to perfection and have already factored in earnings expectations for FY26. This may potentially lead to price corrections.”

Choksey suggests that markets require new investors, and a correction of 15-20 per cent in select shares could present attractive opportunities for these investors, incentivising them to enter the market post-correction.

Some companies are proactively allowing room for corrections, while in several cases, prices continue to remain elevated. Choksey predicts that manufacturing-intensive companies will sustain growth rates ranging between 10 per cent and 20 per cent.

Jaipuria forecasts that corporate earnings growth will remain robust, averaging between 11-12 per cent in the upcoming year. However, returns for FY25-26 may not match the levels seen in the previous year. Over a longer-term horizon of 3-5 years, he anticipates a double-digit Compounded Annual Growth Rate (CAGR), although volatility may be a concern in the near term. With the current P/E ratio at 20x for one-year forward earnings, the market is at an elevated base.

Therefore, he does not anticipate any rerating to occur this year, as was witnessed during the Covid period. Jaipuria does not expect the budget to unveil any surprises, noting that there is limited room for additional spending. Furthermore, government policies are well-established, and he anticipates continuity in the government’s approach.

There is a general consensus that the market is in an overvalued zone and some correction is inevitable. Asit Mehta concurs: “The share markets are fairly valuated, I would say. Midcap and small caps are relatively overvalued as compared to large caps, by and large.”

Certainly, divergent views are commonplace in the market. Amit Jeswani, founder and CIO of Stallion Asset Private Limited, a Mumbai-based PMS company, believes: “Markets are not excessively cheap, but they also aren’t in the overbought zone. I would describe the markets as fairly valued.”

According to Jeswani, sector preferences tend to shift approximately every 2 years. “Previously, it was NBFCs, tech, and pharma; then it shifted to PSU, defence, power, and renewables. Sector rotation is an ongoing endeavour, with investors seeking out the next growth sectors. Overall, the markets are poised for success.”

The existence of divergent views is essential for the market’s dynamics; otherwise, it would invariably move in a single direction, either upward or downward. One perspective suggests the possibility of a time correction in certain shares. This implies that these shares have remained relatively stagnant for a significant period.

For example, HDFC Bank has maintained a narrow trading range between Rs1,400-Rs1,500 since the start of the year. Similarly, Ashok Leyland has been confined within the band of Rs160-Rs180, despite the notable surge in automobile shares. On the contrary, Tata Motors has surged by nearly 50 per cent.

“The current quarter results are expected to be positive, but the outlook for the next few quarters may not be as favourable,” says A Balasubramanian, MD and CEO of Birla Sunlife Mutual Fund. He anticipates that the market could witness some consolidation.

Balasubramanian suggests that the budget may not have a significant impact on the markets, as the BJP government is expected to maintain its growth-oriented policies, particularly emphasising infrastructure projects. He doesn’t foresee many surprises. However, he notes that a good monsoon could potentially stimulate activity in consumer-facing stocks.

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    The current quarter results are expected to be good but the next few quarters may not be so good. Market could see some consolidation

    A BALASUBRAMANIAN, MD and CEO, Birla Sunlife Mutual Fund

Optimism continues

Balasubramanian remains optimistic that the return of the current BJP-led government will attract Foreign Institutional Investors back to the market. He isn’t overly concerned about geopolitical crises, rationalising that most governments have been anticipating such situations and have made adjustments to mitigate any adverse impacts.

Additionally, he believes that a hike in oil prices won’t unsettle countries or companies significantly, given the ongoing focus on alternative energy sources, which can help alleviate the impact of rising oil prices to some extent.

Vikaas M Sachdeva, MD of Sundaram Alternates, a subsidiary of Sundaram Mutual Fund, expresses confidence that manufacturing companies should perform well, considering the ample liquidity in the market.

Business India has been witness to numerous elections and the subsequent market reactions over the past 4 decades. It anticipates that the current election results will not yield any surprises. With Modi and his team back in power, the markets will likely shift their focus to the future. Despite various expectations and anticipations, the budget will emerge as the next significant trigger.

While there may be limited scope for introducing drastic changes due to resource constraints, the upcoming budget will serve as the new government’s initial policy statement.

An invigorated Modi administration, committed to propelling India into the league of developed nations, is expected to introduce some beneficial changes for industries. To meet the funding requirements of a dynamic economy, Modi and his team will need to ensure a vibrant market.For investors, it’s crucial not to be swayed by short-term fluctuations but rather to devise a well-thought-out strategy for wealth creation over the next 5, 10, or 15 years.

With the world’s attention turning towards India, foreign investments are likely to flow into both primary and secondary markets, as well as through direct Foreign Direct Investment (FDI). Pursuing short-term profits may be short-sighted; instead, the focus should be on long-term gains.

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    Markets are not super cheap. But they are not in the over-bought zone. I would say the markets are fairly valued

    AMIT JESWANI, Founder and CIO Stallion Asset Private Limited

Flight to safety

All asset classes moving up in tandem is a rare but not unknown phenomenon

It is rare to witness all asset classes, including equities, gold, silver, and property, moving in the same direction in tandem. Typically, during uncertain times like a recession or a crisis, people tend to gravitate towards gold while avoiding equities and other paper assets due to their higher volatility. Property, being illiquid, presents challenges for entry and exit.

Conversely, during good times, individuals often take on riskier investments in equities over gold. In India, the dollar and oil serve more as benchmarks rather than instruments for trading or investment, given the rupee’s limited convertibility. During stagnant periods with minimal movement, there tends to be little activity across asset classes.

This is of course not the first time this phenomenon has been witnessed. In 2012, equities and gold had moved in synchrony. In 2012, the Sensex closed at 19427, giving a return of nearly 25 per cent while gold gave an overall return of 6.5 per cent. The phenomenon was also witnessed in 2017, 2018 and 2019. In 2019 (which was the Covid period when there was an initial flight to safety) gold rose by as much as 15.9 per cent. The share market which had gone into panic mode initially, recovered quickly towards the end of the year. 

What is particularly noteworthy is the significant rise in gold prices this year. From 31 March, when it closed at Rs6,780 per gram, gold prices surged to Rs7,356 on 12 April, marking a gain of 8.5 per cent in less than a fortnight. Similarly, silver prices rose to an all-time high of Rs85,075 on 12 April from Rs75,044 on 31 March, registering a gain of 13.3 per cent.

This surge isn’t limited to gold and silver; other commodities like copper have also been steadily increasing. Copper, often seen as a proxy for manufacturing, has risen, along with aluminium, buoyed by rising demand. Sanctions on Russia have further contributed to this trend. Asit Mehta suggests: “We are witnessing a flight to safety.” He added: “Maybe the market knows something that we don’t.”

“One reason is there is ample liquidity,” explains Vikaas Sachdeva, MD of Sundaram Alternates, a subsidiary of Sundaram Mutual Fund. Sachdeva further attributes the movement in commodities and currencies to the actions of the US Federal Reserve, particularly changes in the narrative on interest rate cuts and inflation concerns.

He notes that a significant amount of money flowed into index funds, large-cap funds, and tax-saving instruments in March due to the lack of clarity in the markets, given the extreme valuations. Sachdeva highlights that the Nifty is trading at a one-year forward premium of 22-23 times.

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    Manufacturing companies should do well. There is ample liquidity in the market.

    VIKAAS M SACHDEVA, MD, Sundaram Alternates

In 2012, the rise in all asset classes was attributed to high liquidity prevailing in global markets following the global financial crisis, particularly the US sub-prime crisis. Additionally, manufacturing activity had been steadily picking up during that time. A Balasubramaniam, MD and CEO of Birla Mutual Fund, acknowledges that while it’s true that Indians have become richer, the recent uptick in gold prices could possibly be due to asset diversification. He notes that stock markets had risen to near 75k levels in the last fortnight, prompting profit booking as a natural choice. Balasubramaniam emphasises that asset diversification is an ongoing process.

Geopolitical tensions, particularly in West Asia, have also driven demand for gold. Additionally, countries like China and India have been increasing their gold reserves as part of their diversification strategies, reducing their dependence on the US dollar. The People’s Bank of China has been an aggressive buyer of gold for more than a year.

Other central banks, especially those of emerging markets, have also been purchasing gold as part of their diversification strategy to reduce reliance on the US dollar. In line with this trend, the Reserve Bank of India has been bolstering its gold reserves in a move to diversify its asset base.

Over the last few weeks, the RBI has purchased an estimated 13 tonnes of gold. In January 2024, central banks of various countries, including Turkey, China, India, and Russia, bought an estimated 39 tonnes of gold.

It’s uncertain how long all asset classes will continue to move in tandem. Crude oil may be the first to flatten out once the crisis shows signs of abating. A full-fledged open war is not desirable for any country. Additionally, once there is clarity on inflation, both in the US and globally, the stockpiling of gold is likely to slow down. Profit booking in assets may lead to divergence over the next few months.

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