Thinking ALOUD: A third term indicates political stability: Axis Asset Management

The election results are out and the Bhartiya Janata Party (BJP) led National Democratic Alliance (NDA) secured a third consecutive term. The BJP won 240 of the 543 seats in the Lower House (272 seats needed for a majority). However, despite the good strength of the BJP, the numbers fell short of a clear majority and more importantly market expectations. This is a first coalition government for the BJP after a span of two consecutive terms and its allies could play a smaller role. We expect the NDA government to be a stable one given that BJP has a larger number of seats.

Given the expectations of a higher majority post the exit polls and expectations of an even higher share of seats than 2019, markets witnessed a sharp reaction with frontline indices such as the BSE Sensex and Nifty-50 falling 5-6% while mid cap and small cap indices fell 8-9%. As a pre-cursor to the victory and based on exit polls, markets witnessed gains of 3-4% in frontline indices on June 3, 2024 soaring to life time highs, with the BSE Sensex crossing the 76,000 mark while the NIFTY 50 crossed the 23,000 mark. We believe the volatility seen in the past one month would subside going forward. Today, the markets have regained 3-4% of the pullback.

Commenting on the electoral outcome and the way forward, Ashish Gupta, CIO, Axis Asset Management said, “The NDA has secured a third term and this indicates another five years of political stability. We expect the markets will keenly watch the economic policy of the government such as the budget, government’s 100 day plan etc. The volatility faced in the last few days shows why investors should stay invested in the good days and take advantage of the declines to increase exposure to equities. I believe India has all the right ingredients in place to set the growth momentum further. Cyclical tailwinds continue to be strong for sectors such as industrials, infrastructure including power, locally-focused manufacturing, and utilities. Structural themes like financials and consumption should also be on a strong footing. With political uncertainty behind us, the private sector may now start implementing their plans. The capex cycle is already turning around, and government related infrastructure spending should get a boost. The real estate sector is also seeing a significant upturn. We expect the focus to be back to companies and their earnings potential which are the backdrop for India’s long term growth story.”

In the last one year, prospects of political continuity and pickup in economic reforms after the NDA retains power drove the markets significantly higher. In the last one year ended June 3, A third term indicates political stability 2024, the BSE Sensex gained 22.3%, Nifty 50 advanced 25.1%, the Nifty Midcap 100 rose 57% and the Nifty Small Cap 100 gained 65%.

The most reassuring message from the election is that India will continue to focus on macro stability. The policy reforms of the past decade, including flexible inflation targeting, the GST law, allowing retirement funds to invest in stocks, the bankruptcy code, the Real Estate Regulation Act (RERA) and lower corporate tax rates, coupled with social reforms and infrastructure focus have changed the economy's structure for the better. India remains one of the fastest growing economies. Recently released GDP data and S&P Global Ratings upgrading India’s sovereign rating outlook from stable to positive shows its confidence in the economy. India is in the early stages of a multi-year cycle driven by structural themes and cyclical tailwinds.

Disclaimer

Source of Data: Axis MF Research, Bloomberg. Date: 5 June 2024

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