Over 60 nations will have elections in 2024. Around 2 billion voters— a 5th of the world's population—are likely to vote this year. 2024 is being called a super-election year or the biggest election year in history due to carefully watched elections in populous countries like the US, Mexico, India, and Indonesia.

 

The Economist calls 2024 “the biggest election year in history.” TIME calls 2024 “the ultimate election year.” The World Economic Forum calls 2024 a “record year” for elections.

 

Elections often highlight the “confidence game” between financial markets and political actors. The strength of market reactions to elections indicates investors' views on politicians and their policies, which are severe in emerging countries.

 

Political instability and market-unfriendly policies can cause capital flight, higher interest rates, lower stock market valuations, and currency depreciation. Such market responses can raise the cost of capital, increase economic volatility, increase currency and debt crises, and limit government credit.

 

 

Article 324 of the Constitution of India gives the Election Commission of India (ECI) the powers, duties, and functions to conduct elections, while Article 83(2) and Section 14 of the Representation of the People Act-1951 allow the elections to form a new Lok Sabha before its term expires. India has hosted 17 Lok Sabha elections since 1951, drawing hundreds of millions of voters.

 

• 82 days, 7 phases (April 19-June 1), including counting on June 4
• 969 million voters—more than the US, EU, and Russia combined. Voter turnout has steadily climbed, peaking at almost 67% in 2019 compared to 44% in 1951. A 66% turnout would still be more voters than in 2019, making this the largest election ever.
• A 15,256-foot polling booth will allow electronic voting across the country, from the Himalayas to distant jungles.
• With an approximate $14.4bn election bill, it is forecasted to be the costliest in the world. Political parties and candidates will likely spend over 1.2 trillion rupees ($14.4bn) to win voters.
• 303 against 52 seats in 2019 vs 370 or 404 in 2024 - This election will be crucial as the Narendra Modi-led administration seeks a third consecutive term. The BJP-led alliance and Congress-led INDI Alliance will compete for 543 seats nationwide.
• The 2024 elections were preceded by high-profile arrests, farmer protests, electoral bonds, the Ram Temple inauguration, unemployment, and inflation, to name a few.

 

India is the largest democracy and an “increasingly important geopolitical actor” worldwide. The eyes of the world will be on this mammoth electoral exercise as India, given that geopolitical volatility is the biggest risk identified in the World Economic Forum’s Chief Risk Officers Outlook 2023.

 

What makes the present election unique is that in the present context, it appears to be the politics of Vishwas (trust/belief), a type of personal politics in which voters prefer to centralize political power in a strong leader and trust the leader to make good decisions for the polity. For example, voters may be more inclined to cast ballots for the BJP because of Narendra Modi's charm, which hasn't really altered between 2014 and 2019.

 

The successful hosting of the G20 conference and the successful evacuation of its residents who were stranded in Ukraine following Russia's strike are examples of India's accomplishments as an emerging global leader. It's interesting to see, though, that the politics of Vishwas is not exclusive to Narendra Modi. It applies to certain former national leaders, such as Indira Gandhi, for whom the party's and the politician's political success stemmed largely from their personalistic appeals.

 

Investors care about elections if leadership turnover affects investment returns.

 

Market participants closely monitor election results to anticipate changes in legislation, fiscal policies, and sectoral priorities that could affect market performance and investment plans. Various dimensions – pre- and post-election market performance; if the ruling party continues to determine how the market reacts, the market performance in the election year per se can be analysed.

 

Upon reviewing the historical data since 1999, it becomes clear that election results significantly impact market volatility. It intensifies during the period between the announcement of the election schedule by the Election Commission and the counting day, well reflected in the 90 per cent increase in VIX over the last month.

 

The reaction on the counting day is generally subdued, except for in 2004 and 2009, where the market experienced a crash in 2004, while it soared in 2009.

 

In 2019, the market also declined; it is possible that the markets had already anticipated the victory of the BJP-led NDA, and investors were taking advantage of weaker economic fundamentals to secure profits. However, investors' wealth is more affected by market performance after the elections and how equities react to new government policies than by results day. 

 

 

Coming to 2024, markets have been turbulent during the election cycle, with a decline in the last week. However, it is common for the market to decline after a 1,200-1,300-point increase, which happens 15-20 times a year, even without elections. Besides electoral uncertainty, other reasons for increasing volatility relate to worldwide geopolitical and economic conditions like policy rate reduction, US treasury yields, oil price volatility owing to Middle East tensions, etc.

 

It's critical to learn from the past. Markets work like discounting machines that often incorporate forward-looking events into current prices. They typically show a reversal only when unexpected surprises occur. Mandate size will impact the market's reaction this time, just as it did in 2019 when the market had already factored in the NDA victory.

 

A strong mandate is necessary to improve the investment environment, market stability and growth. If the BJP and its allies win fewer seats than in 2019 but still more than the 272 required to form a government, there might be market volatility, but it will settle fast. An unexpected BJP loss and a Congress-led coalition might prompt markets to sell down until the new government's policies are made clear.

 

Exit Polls

 

Based on exit polls, markets expect the NDA political alliance to secure a third term in office, with a high probability of the BJP maintaining its single-party majority. This anticipated political stability should ensure policy continuity, supporting market sentiment and India's valuation premium.

 

Expectations are high as the nation awaits the official results of the elections. Although these polls are used to predict the outcome, history shows they can be inaccurate. For instance, exit polls substantially misrepresented results in the 2004 and 2014 Lok Sabha elections, 2017 UP Assembly elections, and 2015 Bihar and Delhi Assembly elections. BJP won the 2023 Chhattisgarh elections despite exit poll estimates favouring Congress.

 

These examples demonstrate exit poll volatility and remind us that exit polls are prone to flaws, including incorrect premises, close contest margins, cost-cutting demands, human sample problems, historical data reliance, lack of demographic information, and insufficient women representation.

 

So, my dear readers, preparing for many possible outcomes requires strategy and anticipation—it’s almost akin to investigative work. Building responsive structures is essential. “You can anticipate, you can prepare, and you can respond adaptively”.

 

Consider domestic and global factors in your decision-making processes. Markets may move because of reasons other than elections, so we should not just wear an election result prediction lens to predict the market movement. For instance, any unexpected negative surprise on the macroeconomic front could lead to a market crash, besides the uncertainty surrounding elections - re-escalation of geopolitical tensions in Eastern Europe or the Middle East or a shift from the Federal Reserve's dovish stance. 

 

While election results can have a short-term impact, long-term trends are shaped by broader economic forces, technological advancements, global events, and market fundamentals. Economic policies such as taxation, foreign investment, regulatory reforms, international financial environment, and global investors' perception of India as an investment destination are vital. Political stability and favorable policies might attract international investors, leading to rupee appreciation and vice versa.

 

In the present situation, though, the combined market capitalization of all NSE-listed companies has hit the $5 trillion mark, and the country’s market cap to GDP ratio has also inched upwards. Retail investors have continued to exude optimism, with the number of individuals investing both directly and indirectly, as seen in the number of new demat accounts and mutual fund folios, continuing to rise. The contribution through the systematic investment plan route is also growing.

 

But, alongside, there are worries over stretched valuations, especially in the small and mid-cap segments—some stocks are trading at a price-to-earnings ratio that is difficult to justify. Concerns exist over the heightened retail participation in the futures and options segment.

 

Do not get swayed by emotions while making investment decisions, and be mindful of low probability high severity events.  

 

If BJP wins with a significant majority, one might see some profit booking at higher levels, as investors who have been buying over the last two months seek to capitalise on their gains. Modi 3.0 would mean continuing policies favouring infrastructure development, manufacturing, modernisation of railways, etc.

 

Going by BJP's election manifesto promises, all-things-capex is emerging as the biggest investing mantra before elections – infrastructure, sustainable cities, Make in India (Atma Nirbhar), PSUs and PLI. Notwithstanding this anticipation-fueled rally, a few weeks after the election, investors will be confronted with the reality that many of the positives these stocks may have started baking in will be realised only gradually. This may drive profit-taking by the less patient holders.

 

In case of a strong knee-jerk reaction by the market, significant weakness in the stocks could offer buy-on-dip opportunities for investors. Historically, any market underperformance triggered by election results tends to reverse in the medium-to-long term, as markets and businesses adapt to new government policies. Holding a diversified portfolio and reducing risks is always prudent, as the upside could be limited, but the downside could be severe. 

 

Focus on the long-term picture rather than election-related swings.

 

Irrespective of the election outcome, India's GDP is expected to grow in 2024. Smaller enterprises may yield more profits, but larger ones may be more stable. Having a multi-cap approach with equal proposition in large-caps, mid-caps and small-caps will provide for balanced returns, it pays to stick to asset allocation based on goals, while being flexible with investing.

 

Stick to fundamentally strong companies or sectors regardless of election outcomes. It will be wise to hunt for the company-specific growth triggers and look for growth at a reasonable price. Sectors like automation, EVs, defense, railways, logistics, ports, roads, real estate, metals, cement, energy, and financials are the engines of growth in future.

 

Be nimble and selective.

 

Do not undervalue the importance of making informed decisions, staying focused on financial goals and responding to actual developments, not speculations. It is essential to craft a solid investment plan, meticulously pick investments, diversify to manage risk, and remain patient during market uncertainty.

 

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.