WHAT TO EXPECT IN FINANCIAL MARKETS AFTER ELECTION

Stock market overall by nature itself is buoyant and fickle. Volatility is inherent in it and geopolitical factors spike the movements of it in all times. Indian central elections 2024 naturally thus becomes one of the factor to future read the market. 

Every elections introduce uncertainly in the market. This time too the volatility has shot up in last one month. However, the markets are currently pricing in the continuation of the government and ongoing reforms. Nevertheless, elections result sometimes, as seems in the past, can go opposite of expectation. Any deviation in these expectations will result in higher volatility, mostly taking the market downwards.

I would here thus try to analyse what the perceived uncertainty that the market might face in near term and what could possibly be the outcome in medium to long term. 

1. Global Factors : 2024 is not just an election year, it is perhaps the election year. Globally, more voters than ever in history are going to the polls in 64 countries, and also European Union. Around 50% of the world population are heading for national elections, the result of which for many, will prove consequential for years to come. People of counties like Indonesia, Russia, Korea, Iran, Indonesia, Pakistan, Bangladesh have already elected their government, while other than India, EU, USA, UK, South Africa, Mexico will also have new legislature in coming months of 2024. Hence, not just Indian election result will impact the Indian market, the elections results of some other counties might also impact it in near term.
2. Geopolitical Conflicts : Russia-Ukraine are still at war. So are Israel-Hamas. Share markets doesn't like war. It thrives better on peace. However, both the above regional conflicts are on gradual de-escalation. Any major escalation is being avoided by all the players and hence even it may not die soon, the fire might be dimming.  
3. Foreign Portfolio Investors : Since Jan 2024 till upto 14 May, FPIs have been net-seller over Rs.57,182 crore worth on Indian equities, while net-buying around Rs.36,637 crore in Feb and March. The sell-off by FPIs is weighing down the stock market to some extent. The FPI selling is due change in stance from 'sell China, buy India' earlier to 'sell India, buy China ' now. The cheap valuation of Chinese stocks and the relatively high valuation of Indian stocks have influenced the behaviour of FPIs. Hence, Shanghai Composite has recently out performed Nifty 50.

Now, let us look into the factors which can act as the counter-effects against the above factors.

1. Healthy Macros : Indian macro-environment continues to exhibit strength. The domestic economy remains one of the fastest growing globally. The IMF has raised India's GDP growth forecast to 7.8%, surpassing the governments own projection. GST collection hit a record high of Rs.2.1 lakh crore in April 2024. Weather forecaster, Skymet, has predicted healthy rains in the upcoming season. India's headline consumer price inflation, which had already eased to a 10-month low of 4.85% in March, remains low at 4.83% in April. The country's trade deficit narrowed to $78 billion in 2023-24. Meanwhile, India's manufacturing activity hit a 16-year high in March. These are signalling India as a vibrant economy, increased optimism and an ideal state of economy to invest. 
2. Domestic Institutional Investors : DIIs have been net buyer in of Rs.1.9 lakh crore from Jan 2024 till 21 May in cash segment. Any selling by FPIs or FII have been lapped up by DII buying and thus making the market relatively stable. Stronger DIIs are making Indian market insulated from FIIs selling. Moreover, Indian mutuals fund companies are sitting on Rs.1.36 lakh crore cash in April, SBIMF, ICICI Pru MF and HDFC MF together itself is with Rs.62,450 cash. Interestingly, smaller fund houses are having larger percentage of their AUM in cash. Any downward dip in market will make these cash holding deployed by the MFs, thus holding the market steadier.
3. Earnings and Valuation : The earnings season had been subdued so far. Mid and small-cap companies have witnessed earnings downgraded, compared to large-caps. Indian market valuation remain stretched. Nifty 50 valuation however are reasonable as compared to broader market valuations. Nifty 50 premium is just 6%, as compared to premium of 29% and 38% in Nifty Midcap 150 and Nifty Smallcap 250, respectively. Hence, large-cap segment offers a better risk-reward payoff.

However, any deviation from expectation in actual poll outcomes will be viewed unfavourably and even a lower win ratio for the NDA will initially unnerve the market. However, experts insist that markets will soon get over the noise around elections and shift attentions elsewhere. Broader economic fundamentals, led by global events, will guide post-election market dynamics more than just election result. Any corrections should be lapped up investors since mid-to long-term economic and earnings growth prospects remain healthy.

On the other hand, if NDA wins with good numbers, immediate reaction of market will be euphoric and a week to fortnight swing will be upwards. Market will then watch the budget announcement of new government, judge the reforms clue and react to move in a steady way. US Fed and RBI monetary policies will also be keenly watched, since market is expecting a rate cut by Feb and consequently by RBI before calendar year end.

We recommend any lumpsum investment currently should be in Aggressive Hybrid category and SIPs in Multicap category. Both will pave way for better risk-reward ratio in a mid to long term view. Investors with high risk appetite should look into Manufacturing and Defence as themes. MF houses are coming up with interesting offers in both Manufacturing and Defence theme funds. Investors must allocate 5-10% of their portfolio in these schemes. 

Inputs and data from ET Wealth, Time Magazine