Markets shrug off election results shock, embrace NDA coalition; now eye policy continuity for upside

NSE Nifty 50 jumped as much as 3.4 percent on June 5, and extended gains by another 1.2 percent on June 6, topping 22,900 points intraday.

India’s stock markets have seemingly shrugged off the shock of the election results – overcoming early concerns of the Bharatiya Janata Party failing to secure a majority on its own – and have rebounded on renewed confidence in the continuation of the National Democratic Alliance coalition government.

This is evident from the sharp rise in the benchmark indices after the 6 percent fall of June 4, when the votes were counted. The NSE Nifty 50 jumped as much as 3.4 percent on June 5, and extended gains by another 1.2 percent on June 6, topping 22,900 points intraday.

Sandeep Tandon, CEO of Quant Mutual Fund, told Moneycontrol that India's macroeconomic fundamentals remain strong, and the focus on policy continuity, infrastructure, and capital expenditure will persist.

Policy continuity

Tandon noted the likely continuation of the government’s economic development policies, citing past instances. In Uttar Pradesh, chief minister Yogi Adityanath of the BJP has done a lot of good work. However, earlier, Akhilesh Yadav also invested a lot in infrastructure, and before that, Mayawati did too, said Tandon.

Prime Minister Narendra Modi’s BJP won 240 Lok Sabha seats, falling short of the 272 required for a majority. The stock markets tanked on the news, and the Nifty ended at 21,884 on June 4, down 6 percent from the previous close.

However, the NDA won 292 seats, which was above the majority mark. As the markets absorbed the news, the initial fears of instability gave way to optimism.

Kotak Equities Research predicted minimal changes to the new government's economic agenda, despite its coalition nature.

“We expect the 'new' government to continue with its investment-led economic agenda, but it may tweak its priorities to support consumption and employment. We will get a better sense of the same over the next few weeks and in the FY25 final budget,” Kotak analysts said.

They added that concerns over a shift towards populist policies might be overblown and that the economic agenda is likely to remain focused on long-term growth.

Buying opportunity

While Tandon was not worried about policy disruption, he said the recent market volatility was a good opportunity for investors to buy Indian equities at attractive prices. The nation’s fundamentals haven’t changed, he added.

“It was a great opportunity (on June 4). The data points were very constructive,” he said. “Our thesis is that India is a great buying opportunity for a few decades or half a century. India is a ‘buy on dips’ strategy. The Indian markets have repeatedly fallen 12-20 percent post-Covid but have always bounced back.”

Other investors also viewed the initial selloff as a prime buying opportunity.

“The first thing I did was message my portfolio managers who invest in India to say if Nifty banks are down because of a lower-than-expected mandate for Modi, it’s a buying opportunity,” Arun Sai, senior multi-asset strategist at Pictet Asset Management, said in a Bloomberg news report.

He said foreign investors underestimate policy continuity in India and asserted that the coalition government will maintain the country’s economic trajectory.

“What the average foreign investor gets wrong about India is policy continuity. They think that if Modi gets less of a mandate, then a lot of the policies will go to the background. The policy continuity is being underestimated; it isn’t too much of an issue in India,” the Bloomberg report quoted Sai as saying.

Coalition benefits

Tandon noted the benefits of coalition partners, notably Telugu Desam Party leader Chandrababu Naidu, who has a strong understanding of technology and development.

"He has the understanding of technology, telecom, and is a forward-looking person. He’s a very development-centric partner,” Tandon said of Naidu.

Analysts at global brokerage firm CLSA too shared a promising outlook for Modi 3.0.

"Our channel checks hint at an ambitious 100-day agenda being set, poised to propel the incoming Modi government into action," CLSA reported.

It highlighted potential large orders in infrastructure and defence and dismissed concerns over populist measures.

“While the need for allies to stay in power is seen as a cause of worry for the BJP, demands from coalition partners for more capital expenditure are likely to revive capex on the state level as well,” CLSA added.

Brokerage Bernstein expressed confidence in the coalition government's stability, citing pre-poll seat-sharing arrangements and a consensus on policies within the NDA.

"There are no contentious topics as the NDA had a consensus on policies,” Bernstein analysts said.

Sector rotation

Bernstein said the market's initial reaction was overblown and there is room for a modest rebound.

“Capex-linked stocks are likely to lead the recovery,” Bernstein noted, retaining its view of high single-digit returns and keeping the Nifty target unchanged at 23,500.

The Indian markets, which have been resilient in the past by bouncing back from significant dips, are now looking forward to continued policy reforms and economic growth under the NDA coalition. Tandon said investors are particularly keen on upcoming policy announcements and the first 100-day agenda, which are expected to provide more clarity and boost market confidence.

The sector rotation in the markets is also noteworthy.

“Some stocks or some sectors might get derated due to high earnings multiples; the hype stocks can consolidate and correct for a while. Maybe something new will emerge, like the consumption sector is coming back,” said Tandon.

This indicates a strategic rebalancing of portfolios in anticipation of policy adjustments and sector-specific growth opportunities.

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