Political uncertainties and rich valuations are weighing on Indian equities this month ahead of a hotly-contested national election in which the incumbent Narendra Modi-government is hoping to gain a resounding victory.
That has meant that the country’s stocks — which tend to see stellar rallies in the run-up to polls — remain uncharacteristically languid.
Parliamentary elections in India will be held in phases from April 19 to June 1. But a string of recent developments have cast doubts over whether Modi’s Bharatiya Janata Party (BJP) can get a resounding victory.
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The biggest concern looming over the BJP involves a disclosures on electoral funding for the party, with court-directed disclosures showing billions worth of inflows from shady donors.
Meanwhile, the Modi-government has also charged the Congress-led opposition alliance with a host of tax and corruption-related fines, leading to uncertainty around the democratic polling process.
Those uncertainties, combined with an already pumped rally in Indian equities over the past year has given investors reason to pause, analysts say.
The benchmark Nifty index has climbed over 30% over the past year, the second biggest gain among Asian indexes. Similarly, the BSE Sensex is up nearly 24% since last year.
Abhisekh Goenka, founder and CEO of wealth management firm IFA Global, said stocks had been weighed down this month by profit-taking at the financial year end in March and political factors.
“The uncertainty will loom till election results are out, and as widely expected, if BJP sweeps the polls, we expect a further breakout rally in the equities,” Goenka said.
Historically strong period
Indian equities tend to start strong in election years. The Nifty index averaged a 5.2% return in the first quarter of the previous three election cycles. This year, however, the index is averaging only a modest 2.7% increase in the same period.
Foreign capital inflows have also dried up. In contrast to the $3.08 billion received from foreign investors in the first quarter of the past three election years on average, the inflow has dwindled to just $1.33 billion in the same period this year.
“Heading into elections, we could see some volatility amongst specific areas of the Indian market, such as small-cap stocks, which have rallied over 54% over the past 12 months,” Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs.
“Prices have moved ahead of earnings momentum, making some of these names more vulnerable to headline risk.”
However, the Nifty Volatility index, commonly known as India’s VIX, is trading around 12, its lowest in the run-up to the election compared to the last three cycles.
Betting on growth
Even so, not everyone is apprehensive. Investors betting on India’s strong growth say its stock market is more appealing than that of other emerging markets.
Martin Schulz, head of the international equity group at Federated Hermes, said he has increased allocation to India in the fund’s investment strategies over the past year, reaching 16% of its emerging markets strategy funds.
Fitch revised its economic growth projections for India upward for this fiscal year and next, citing robust domestic demand and continued growth in business and consumer confidence.
Earnings prospects also look strong, with LSEG SmartEstimates data indicating a 26.8% net profit growth for India’s large and mid-cap companies this year, compared with Asia’s average profit growth of 14%.
“Polls expect a Modi victory, which would suggest economic continuity and act as a catalyst for positive flows,” said Global X ETF’s Dorson.
“If we see an unexpected loss for Modi, the market could correct, however, it would open a valuation-based window, as investors digest the surprise and realise that this economy still benefits from strong secular tailwinds. Either way, I expect a strong second half of the year for Indian equities.”
- Reuters, with additional editing by Vishakha Saxena
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