What a week it has been for the Indian stock market! The action-packed week highlights that political risk in stocks is a severe issue. The BSE Sensex has been on a roller-coaster of ecstasy, despair, and hope

• rising ~2,500 points on Monday,
• falling ~4,400 points on Tuesday, the worst crash in four years, and then
• rising ~2,300 points on Wednesday.

 

India's equity benchmarks, BSE Sensex and NSE Nifty, closed nearly 1% higher, with The Sensex up 692.27 points on Thursday as the BJP-led NDA is set to form the next government at the Centre, though not with a clear majority but a coalition.

 

Though for 32 years of India's 71-year electoral journey, the country saw coalition politics, this time, after a 10-year break, coalition politics has returned. Over the last decade, the GDP per capita has risen from about $5,000 to more than $7,500. During that time, India has gone from being the ninth-largest economy in the world to the fifth-largest.

 

The show is far from over. It is not too far-fetched to expect further swings in the coming days as the pulls and pushes of coalition government formation and their consequences and repercussions become more apparent.

 

The BJP's biggest allies in the NDA, including the Telugu Desam Party (TDP) from the southern state of Andhra Pradesh and the Janata Dal (United) – also known as the JD(U) – from the state of Bihar, pledged support to the BJP and Modi.

 

And post the election results; the allies are exacting the pound of flesh by putting forward their demands - including important positions like the post of speaker in the parliament, key cabinet positions, along with the special category status (SCS) for their respective states (which grants preferential treatment in terms of assistance from the Centre, tax breaks, setting up special development boards, and reservation in local government jobs and educational institutions)

 

Investors should remember that this is not our first time seeing a coalition government. Globally, coalition governments play a crucial role in ensuring broad representation and promoting inclusive governance. Notwithstanding that, they face challenges related to stability, efficiency, and policy coherence. The impact of coalition governments varies widely based on each country's political context and institutional frameworks, influencing governance and economic outcomes.

 

Moreover, a BJP-led coalition government is not necessarily bad for the economy. Looking back in the past, in 2004, it can be seen that when benchmarks collapsed 20% after NDA's surprise defeat, the markets recouped all the losses to generate positive returns six months and one year later.

 

Historically, the Nifty has delivered +9 per cent/+8 per cent in the 3/6 months post general elections since 1991, showing that in the past, a correction or dip has typically ended up as a buying opportunity over the longer term. A coalition government has not always been bad for the stock markets, data from PMINdia.gov.in suggests.

 

 

I urge investors to reassess the shifts and refocus. Refrain from getting obsessed with elections and politics when making investment decisions. Reiterating other factors that impact the stock market and its performance over time:

 

• India's economic advantage remains largely unaffected by the election outcome. India's growth story is based on good demographics, an educated population segment, a large domestic market, and the cumulative impact of past reforms coupled with the surge in digitalization and extended geopolitical tensions between China and the US, favouring a shift to India. The market's future trajectory depends on the new government's economic policies, with factors like GDP growth, inflation, and global conditions playing a pivotal role.

 

• Monetary policy announcements immediately after elections play a critical role in shaping economic expectations and stabilizing markets. In its MPC meeting post-election, the Reserve Bank of India (RBI) kept the rate unchanged at 6.5%, raised the GDP forecast to 7.2%, retained inflation estimates at 4.5%, and expected a good monsoon. However, it might face pressure to adjust its interest rates in response to changing global capital flows and the resultant impact on the exchange rate and inflation.

 

• It is equally important, if not more important, to study global economic developments analytically. For instance,

 

• European Central Bank cuts interest rates to 3.75% for first time in 5 years, following Canada.

 

• US Federal Reserve is expected to keep rates on hold next week at a 23-year high range of 5.25 per cent to 5.5 per cent after price pressures in the world's biggest economy proved more stubborn than expected.

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• The Bank of England is also considered unlikely to lower its bank rate from a 16-year high of 5.25 per cent when it meets on June 20.

 

Remember, these decisions on interest rates impact the real economy in more ways than one. A cut in interest rates should boost economic activity by making it cheaper for consumers and businesses to borrow. It can have a range of impacts on India, given the interconnectedness of global financial markets.

 

The effects could be direct and indirect, primarily related to capital flows and investment. Lower interest rates in the Eurozone or the USA can lead investors to seek higher returns in emerging markets like India, resulting in increased capital inflows into Indian equities and bonds.

 

For instance, following the ECB's rate cuts during the Eurozone debt crisis, India saw a surge in foreign portfolio investments as global investors looked for better yields in emerging markets. This increased capital inflow could also lead to an appreciation of the Indian Rupee (INR). While a stronger rupee can help control inflation by making imports cheaper, it can also make Indian exports less competitive. India's exports of automotive components, pharmaceuticals, textiles and IT services to Europe could be influenced by changes in the exchange rate.

 

A broad consensus exists that India has been one of the most expensive markets in the world for quite some time, partly due to a massive influx of domestic flows into the market. This sentiment has also been echoed by the regulators when SEBI comes out with notices warning retail investors to stay away from small and micro-cap stocks which are trading in derivatives, etc. 

 

As we move ahead, geopolitical tensions could weigh on growth. At the same time, extreme weather events and the climate crisis, more broadly, could drive up food prices.

 

So, my dear readers, my message is to beat the heat this summer.

 

Stay away from the overheated stocks. Advise caution and make investments carefully.

 

2024 would continue to give more surprises – like US elections, the budget in July, geopolitical tensions, etc.

 

Never forget

Focus more on numbers and less on narrative!

"Data-based decisions should be data-based decisions,"

 

Best Regards
 
Dr. Tarunika Jain Agrawal Ph.D. 

Alpha Research

 

 

Disclaimer

The above views are our expectations of the economy, market and investments. The views may or may not play out accordingly. You are requested to do your own due diligence before making any investment.