Could markets still decline despite a Modi victory in India's elections?

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The big story

In the days following the conclusion of the final phase of voting for the General Election, India will determine its political victors and defeats.

The stock market will also give its judgment when markets open on Monday.

Exit polls by local media outlets are likely to be released soon after voting ends on Saturday, even though the official counting of ballots will not begin until June 4.

The India VIX index, a measure of investor fear, has increased by over 135% since its April lows due to nervousness among investors about the results.

Concerned investors believe that the government will delay significant economic reforms unless Prime Minister Narendra Modi's BJP party achieves a substantial victory.

In the last Parliament, the BJP-led coalition held nearly 350 seats, which was more than 60%, and markets predicted that the incumbents would win a record 400 seats in the upcoming elections.

A significant portion of the population would support Modi's efforts to modify the constitution and revise land acquisition and labor laws, according to experts, who believe these changes are vital for accelerating India's economic development.

Last week, the benchmark index reached a new record high, surpassing 22,967 points, with traders anticipating the election results.

The BJP-led coalition is facing increasing risk of negative surprise loss as the market prices out the possibility of a loss, according to Bank of America analysts in a recent research note.

The equity options market anticipates a 4.5% movement in stocks on the first trading day following polls' closure.

The India VIX has decreased, as concerns about low voter turnout and close contests in certain regions have been alleviated.

According to Bradley Saunders, assistant economist at Capital Economics, the BJP's pre-election talk of securing 400 seats was likely more political hubris than a realistic goal, but they still entered the election with the largest single-party majority in nearly 40 years.

"The BJP's strong performance in state elections at the end of last year suggests that it will be difficult for it to lose a lot of goodwill in a short amount of time. As a result, it is likely that the BJP will secure another parliamentary majority."

Saunders mentioned in a note to clients that the turnout in the recent elections was lower than in 2014 and 2019, but it is consistent with the historical average, as indicated by data from the Election Commission.

Even if Modi's BJP wins in a landslide, equity strategists warn that the stock market may be negatively affected. This is a common occurrence where the market buys the rumor but sells the news.

Venugopal Garre, Bernstein's strategist, stated that there is a brief deviation from the 23K nifty target, but prompt profit booking restores it below that level.

Garre stated that equity markets knew about the continuity of power, which led to a rally in Nov/Dec last year. However, playing the same theme repeatedly can result in absurd valuations, which is why the focus will eventually shift back to macro, earnings growth, and reasonability of valuations.

Need to know

The heatwave that has gripped the country has caused temperatures to hover at record highs, with Delhi and areas in the northwestern and central regions experiencing temperatures near 50 degrees Celsius (122 degrees Fahrenheit) throughout the week. The Delhi region also recorded its first heat-related death of the year, according to Reuters, citing local media.

S&P upgrades India's sovereign rating outlook to positive, citing rapid economic growth and a constructive impact on debt profile. Fitch Ratings also notes the recent $25 billion dividend from the central bank to the government will lower the budget deficit next year, which is a positive event if it continues to fall in a sustainable manner.

The Kolkata Knight Riders emerged victorious in the IPL, leaving the Sunrisers Hyderabad struggling to keep up. SRH were bowled out for 113 in the first innings, a record low in an IPL championship game. The Knight Riders easily chased down the target with eight wickets to spare.

What happened in the markets?

This week, Indian stocks experienced a decline of over 2%, which wiped out the gains made in the previous week. Despite this, the index has still risen by 3.43% since the beginning of the year.

The Indian government bond yield remained relatively stable, with a yield of 7% despite better-than-expected budget deficit reduction.

This week on Biz Focus Hub, veteran emerging markets investor Mark Mobius stated that a BJP landslide victory would make him a "super, super bull" on India. He also disclosed the sectors he is most optimistic about.

Despite economic fundamentals being "very, very strong," foreign investors are in a "wait and watch mode" before India's election results.

What's happening next week?

India's central bank will discuss interest rates next Friday, while exit polls will indicate the probable winners over the weekend. The vote counting will commence next week.