Indian equity investors heaved a sigh of relief after the outcome of the recently concluded state elections. The Bharatiya Janata Party (BJP) impressively overcame key rival Indian National Congress in the crucial Indian core states of Madhya Pradesh, Rajasthan and Chhattisgarh.
This Indian zone accounts for about 12% of the total Lok Sabha seats, and the BJP’s performance in these three states has raised expectations that the party will retain a majority in the next general elections and calmed concerns about political uncertainty and political instability.
Reflecting this positive sentiment, the BSE Sensex hit an all-time high of 68,918.22 and the Nifty50 scaled a new peak of 20,702.65 on Monday.
However, investors should be cautious as the results of state elections have not always shown correlation with Lok Sabha polls, said Motilal Oswal Financial Services. For example, BJP lost these three states in December 2018, but won the Lok Sabha elections in 2019 with a better majority than in 2014.
Local issues primarily influence state elections, while economic growth takes center stage in parliamentary elections.
This time, state elections were marked by welfare schemes/freebies, especially those targeting women and girls. The free strategy may continue before the general elections and could keep state finances under pressure.
“Investors were worried that a poor showing by the BJP in state elections would increase the risk of more fiscal populism,” said a December 3 Nomura Global Markets Research report. “Thus, the actual results should allay such fears, although a BJP victory across most states does not necessarily reduce the likelihood of competitive populism recurring as a dominant theme in the 2024 general elections, in our view,” its economists added.
On the bright side, stocks of companies with rural and healthcare exposure can benefit from the welfare plans. Oil marketing companies could also see an improved revenue outlook with the reduced likelihood of retail fuel price hikes. Mid caps, small caps and PSU stocks are also expected to take a positive dive.
Despite the reduced political uncertainty and the relaxation of crude oil prices, corporate earnings must reach to justify the high valuation multiples of India.
The MSCI India index trades at a one-year forward price-to-earnings ratio of 21 times, Bloomberg data showed. This is a premium to MSCI Asian Ex-Japan and MSCI Emerging Markets indices.
Inflows of foreign funds are also expected to strengthen with the risk of political uncertainty likely to decrease. In addition, crude oil prices have declined from recent peaks, putting India on a relatively firmer footing. Thus, this rating gap is likely to continue.
While no steep downgrades are expected to FY24 earnings estimates, significant upgrades are also unlikely without an improvement in demand.
Certainly, the Nifty50 has given decent performance in the past ahead of general election results. That said, the general elections are still months away and any political change could derail the momentum.
Meanwhile, investors will be closely watching the Reserve Bank of India’s monetary policy meeting scheduled for this week. The central bank is largely expected to maintain a status quo on interest rates and hold back on its retreat from an accommodative stance. “Despite a correction in retail inflation in the last three months, a rebound in selected perishable and ‘stickier’ food items such as cereals and pulses is likely to push inflation back to 6% this quarter,” said DBS Bank senior economist Radhika Roa. in a note.