Post-Poll Investment Strategy

Now that the slightly foggy situation that emerged from the election results has cleared and the BJP has taken the responsibility of steering the nation forward through a continuation of its policies to make India the third-largest economy in the world, what should an investor do to maximise the potential for wealth generation? The article takes a deeper look at the post-poll scenario and provides guidelines for both experienced and fresh investors 

Imagine an investor who was off exploring another planet during the first week of June, missing the exit poll of India’s general election and its market reaction. This investor also missed the dramatic turn of events following the actual election outcome. Upon returning to Earth, he observes that the market has risen by nearly 2.2 per cent since his departure, seemingly unaffected by any significant turbulence. However, what he missed was one of the most volatile sessions in the Indian equity market since the corona virus-induced upheaval. This heightened volatility stemmed from an unexpected election result. Market expectations had pegged the incumbent BJP government to secure a larger majority, a sentiment reinforced by exit polls. Consequently, on June 3, 2024, the market surged, with frontline indices gaining 3-4 per cent. The BSE Sensex hit a lifetime high, crossing 76,700, while the Nifty 50 breached the 23,300 mark. 
 

The following day, as the actual election results began to roll in, the market reacted sharply. The exact result was not what the exit note had projected. The BSE Sensex and Nifty 50 plummeted by 5-6 per cent, while the Mid-Cap and Small-Cap indices experienced even steeper declines of 8-9 per cent. In absolute terms, this might have been the largest swing witnessed by frontline indices. On June 4, the Sensex experienced a swing of 6,066 points between its high and low, an 8 per cent shift from the day’s opening. Similarly, Nifty 50 saw an intraday swing of almost 1,300 points, double of any of its previous highest intraday swing. 

Such significant volatility can trap many investors and traders in unfavourable positions. Investors might panic-sell or purchase shares at inflated valuations, while traders could find themselves on the wrong side of trades, leading to further losses. Therefore, the lesson learnt from the above is to never count your chickens before they hatch. The game isn’t over until the final whistle. Clarity on the government’s formation next day and its priorities helped stabilise the market. Within the same trading week, the frontline indices had recouped all losses and were trading near all-time highs as of June 7. 

The market’s rapid recovery was driven by the confirmation that the NDA would form the government, fostering a belief in policy continuity. As we analyse the market’s behaviour post-election, it is clear that political stability plays a crucial role in investor confidence. Moving forward, the market is expected to closely monitor the new government's economic policies, budget plans, and key ministerial appointments. With the political uncertainty resolved, the focus will shift to the economic strategies that will drive India’s growth in the coming years. 

Post-Election Returns
Historically, Nifty has delivered 9 per cent return in the three months and 8 per cent return in the six 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. When we extend the study for the entire election year, we have witnessed most of the time that the calendar year returns of election year is positive. Since 1981, the Indian equity market represented by Sensex has shown positive returns in election years 80 per cent of the time. The highest return was recorded in 1991, with an impressive 82.1 percent gain, coinciding with P V Narasimha Rao becoming the prime minister and initiating significant economic reforms. 

The median return for the election years stands at 20.8 percent. Out of 12 election years, the market posted negative returns only in 1996 and 1998. This time we have already seen that since the start of the year, the Sensex is already up by 6.1 per cent and if one were to purely go by history, there might be some juice left for the investors. The following graph shows Sensex returns over different election years. 

The following graph shows Sensex returns over different election year 

History of Coalition Governments and Reforms 

One of the reasons why the market reacted in such a fashion is that in the first week of June the positioning of the market was based on the expectation that there would be a clear win for the BJP. However, it did not materialise as predicted and there was not a clear mandate for a single party. It’s insightful to examine how the market has performed during coalition governments. Over the past 30 years, coalition governments have often been better for the market and the economy. For example, during the Congress-led alliance from 2004 to 2014, the MSCI India index surged more than 180 per cent, more than double the MSCI World index. 

Coalition governments can improve relations between the centre and states, enhancing decision-making and reducing the trust deficit seen in recent months. Let’s examine the past coalition governments’ performance and their ability to take bold decisions. 

P V Narasimha Rao —
Leading a minority government, Rao’s administration implemented significant reforms, including abolishing the licence-permit raj, initiating privatisation and steering India towards a market-oriented economy. These reforms were driven by a severe balance of payment crisis and depleted foreign exchange reserves. Under his leadership, India also joined the World Trade Organization (WTO).

H D Deve Gowda —
Amidst uncertainty over economic reforms and political instability in regions like Punjab, Nagaland and Jammu and Kashmir, Gowda’s administration saw Finance Minister P Chidambaram present a ‘dream budget’. This included lower income tax rates, the removal of corporate tax surcharges, and the introduction of the voluntary disclosure of income scheme, which broadened the tax base. 

Atal Bihari Vajpayee —
Vajpayee’s government continued the reformist agenda of P V Narasimha Rao by establishing the Department of Disinvestment to privatise failing public sector units. His administration’s notable achievements included acquiring a 20 per cent stake in Russia’s Sakhalin-I oil and gas fields, implementing the Fiscal Responsibility and Budget Management Act, and introducing the New Telecom Policy, which replaced fixed license fees with a revenuesharing arrangement. Additionally, the Information Technology Act of 2000 laid the foundation for India’s e-commerce market. 

Manmohan Singh —
The UPA-I government under Singh introduced the Right to Education Act and the Right to Information Act, enhancing transparency and ensuring no Indian went hungry through the Right to Food. The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) provided minimum employment to the rural poor. Singh’s government regulated fuel prices and initiated direct benefit transfers, as well as Aadhaar and GST development. In 2009, Singh’s administration waived farmer loans amounting to ₹ 65,000 crore. 

Coalition governments have not always been detrimental to the stock market. During V P Singh’s coalition government from December 1989 to October 1990, the Sensex returned 95.6 per cent. The most impressive market performance under a coalition government was during UPA-I, with the Sensex surging 179.9 per cent. Under UPA-II, the Sensex gained 78 per cent, while Nifty rose 73.6 per cent. BJP has successfully run a coalition government from 1999-2004 and 2014-2024. 

Note, in the 2004 election when a Congress-led government came in with support from the left party, the markets were worried about an unstable coalition. Benchmark indices hit lower levels post the result, but within six months the markets had recouped all the losses and staged one of the biggest bull runs up to 2007 led by strong economic momentum. These historical insights illustrate that coalition governments can drive significant economic reforms and market gains, often surpassing periods of single-party rule in terms of market performance. 

Sectors to Watch Consumption to Come Forefront Analysing the election outcome reveals that the NDA secured a better vote share in urban areas, while their support in rural areas declined. This highlight concerns about a ‘K-shaped’ recovery in India post-pandemic, emphasising the economic divide between rural and urban regions. While policy priorities may shift slightly, dramatic changes are unlikely. The election outcome may prompt policy adjustments, potentially leading to an increase in freebies and social engineering efforts in upcoming announcements. 

This could drive growth in consumption, benefiting sectors such as two-wheeler automobiles, FMCG and healthcare. Additionally, the India Meteorological Department’s forecast of a normal monsoon bodes well for sectors that depend on the demand of their products from rural areas. FMCG companies may see better volume growth as better crop yields can ease inflation and boost production, leading to higher consumption demand. Yes, there may be some valuation concerns. 

Moving forward, we may see sector rotation with consumption, which had been underperforming, now taking the lead. Companies catering to rural consumers, such as those in the two-wheeler, staples and low-priced food sectors, have shown strong performance recently. Companies selling soap and low-priced snacks are also performing well, indicating market expectations that the new coalition government will focus more resources on rural development. Whilst we can debate the merits of this, it could be a tailwind for consumer stocks that have have lagged in recent quarters. Consumer staples names could see some re-rating, together with other sectors and stocks focused on mass market consumption. 

Infrastructure to Gain Momentum
The loss of the YSR Congress Party in Andhra Pradesh, despite welfare measures and cash transfers, underscores the importance of infrastructure development in voting behaviour. While the government is expected to continue its focus on infrastructure, some allocation may still be directed towards welfare schemes. With the TDP sweeping the recent Andhra Pradesh polls, the Amaravati capital region is likely to witness a revival marked by a construction and real estate boom. The green shoots of this resurgence are already apparent. 

With the expiration of the 10-year deadline for Hyderabad to remain the joint capital of Andhra Pradesh and Telangana on June 2, 2024, the TDP’s proposal to develop Amaravati assumes new urgency. Additionally, the central government will continue to prioritise infrastructure development. The presence of a coalition government is unlikely to change this focus, as the highway development plan remains a top priority at the highest levels of the government. The market has been bolstered by strong rumours that the previous government had prepared a 100-day plan to accelerate infrastructure spending. 

Prime Minister Narendra Modi has recently said that the speed of implementation of infrastructure projects will be accelerated manifold in the next five years to make India the third-largest economy in the world. This is evident from the fact that so far he has inaugurated and laid the foundation of projects worth ₹ 10 lakh crore this calendar year. Since infrastructure is the key for enduring economic growth, expect railways and highways to remain on top of the government agenda. 

This also means all the related sectors such as minerals and metals will be growing too. According to Railways Minister Ashwini Vaishnaw, railways have a multiplier effect of 4+ as compared to 2.3 in other infrastructure areas. “This is because the development of railways is a combination of various sectors, and every aspect of all important sectors has to come together to make these efforts a success,” he said. Hence, we believe that infrastructure companies will remain in focus going ahead. 

Manufacturing to Attract Attention
India has historically struggled to establish itself as a manufacturing powerhouse due to a challenging business environment. Currently, the manufacturing sector contributes less than 15 per cent to GDP, lagging behind other emerging and neighbouring economies like China, Vietnam and Bangladesh, where the figure exceeds 20 per cent. However, structural reforms, infrastructure investments, productionlinked incentives and geopolitical factors are transforming the outlook for Indian manufacturing. 

Opportunities are emerging with India’s manufacturing upgrades. A significant increase in mobile phone production and exports exemplifies the early success of the broader production-linked incentives scheme. This progress fuels optimism about India’s potential to become a global manufacturing hub. Future policies are expected to enhance local manufacturing capabilities through initiatives like ‘Make in India,’ removal of bureaucratic hurdles, and an improvement in the ease of doing business to attract more foreign investment. 

Additionally, India aims to bolster the new energy landscape, focusing on green hydrogen, solar technologies, micro grids and electric vehicles. We anticipate the government will promote manufacturing with ambitious new laws, tax reforms, incentives, trade pacts, indigenisation efforts and duty reforms. These measures are designed to enhance the ease of doing business, stimulate private capital expenditure, and attract foreign investors. Therefore, we believe a wide range of companies falling under the ambit of manufacturing will capitalise on their potential for the next five years.

Large-Caps Take Priority
We recommend focusing on large-caps over small-cap and mid-cap stocks. The market has already anticipated policy continuity based on the current government formation. We continue to prefer large-caps because they offer valuation comfort. An expected increase in risk perception could impact multiples in the near term, putting pressure on the small-cap and mid-cap segment, particularly given the frothy valuations observed in these areas. The graph below showing valuations illustrates the fact that the broader market, especially mid-caps, is trading at higher valuations compared to large-caps. Consequently, we may see a shift in investor preference towards large-cap stocks. 




Valuation and Outlook
In terms of valuation, the MSCI India index is currently fairly valued, trading at a 12-month forward consensus price-toearnings (PE) multiple of 21.9 times as of June 7, 2024. This is one standard deviation above its 10-year historical average of 19 times. Additionally, India is trading at a significant valuation premium against the MSCI Asia ex-Japan index at 65 per cent, compared to the historical 10-year average of 50 per cent. Hence, we believe the markets are expected to closely monitor the government’s economic policies, including the budget, the 100-day plan, and key portfolio announcements, especially in finance. This will determine the short-term movement of the Indian equity indices. 

India has the necessary ingredients to maintain growth momentum. Recent GDP data and S & P Global Ratings’ upgrade of India’s sovereign rating outlook from stable to positive reflect confidence in the economy. Therefore, we believe the long-term story of India remains intact. Companies in sectors that we have discussed above will be closely watched by investors. Many expect the Indian markets to continue growing over the next five years, driven by the government’s new initiatives that promote key sectors. Policy continuity, the hallmark of a returning government, ensures that the agendas are durable and productive, offering long-term visibility and stability for investors.