How will the Indian stock market perform after the General Election 2024?

The results of the General Election 2024 were announced yesterday. And the market fell like there is no tomorrow! Is this a knee-jerk reaction, or should you be worried? Here is our data-driven verdict!

Don’t panic!

In this article, we have analyzed the impact on stock markets in the aftermath of election results.

Nifty 50 crashed by almost 5% on 4th June as it became clear the incumbent BJP would not cross the majority mark on its own. Although the market reaction was expected, we believe that it was an overreaction (as is generally the case with stock markets).

At the time of writing this article, Nifty 50 is already back in the channel and is trading above 21-day EMA and pre-poll close (22530) on Friday.

So, let's discuss the major worries of stock market participants and our take on them.

Worry 1: We are back to the era of unstable government

Our take:

Not exactly. Yes, the incumbent does not have the full majority of its own. But let’s do the math. BJP has 240 seats of its own. Add to that 15 seats from very dependable allies (SHS and LJP being the primary ones), and you already have 255 seats. Even if JDU and TDP were to leave the alliance, NDA would easily fill the deficit of 17 seats with other allies and independents. So, a 1999 redux is highly unlikely.

Worry 2: Hard reforms will take a back seat.

Our take:

Even with a full majority, the BJP government was unable to go through 2 of the hardest reforms – Land and Farm. Therefore, from a market perspective, it doesn’t really matter.

Worry 3: Freebie politics will be back in business.

Our take:

Again, the BJP government is already doling out enough freebies. Will it step on the freebie accelerator? Maybe.

But, as long as fiscal stability is maintained, markets should not be worried. Given the track record of this government regarding fiscal stability and inflation, we should not be worried. Coupled with robust growth, the government should have enough resources to maintain fiscal stability without resorting to tax hikes.

Worry 4: The Government will turn populist and roll back on infra spending.

Our take:

This is like the previous point. The government, for all intent and purpose, is already a populist one. As long as there is fiscal space (which we believe is the case), we see no reason for any rollback on infra capex. Do remember that focusing on infrastructure has always been one of the core thought processes of NDA governments – even the one where BJP had just 182 seats!

Summary:

When in doubt, zoom out!

In the end, stock prices are driven by expectations of future cash flows (Valuation 101) and any news/event that has a bearing on “expected” future cash flow impacts prices in the near term. However, as usual, the short-term reaction is driven more by sentiments, which leads to overreaction.

This overreaction is what provides buying/selling opportunities. After yesterday’s fall, Nifty 50 PE dropped to 20.81. This is an 8% discount to 3-year average PE and a 10.3% discount to 5-year average PE. So yes, the 4th June correction is a buying opportunity.

Here’s why:

• We are still the fastest-growing economy, and the growth story remains intact.

• We have strong support from the monthly SIP book.

• The global economy is expected to witness a synchronous rebound in 2025.

• Expected rate cuts by Central Banks by the end of 2024 or early 2025.

• Valuations, on a relative basis, remain reasonable.

• Overall, we do not see anything in these election results that will impact the expected future cash flows of Indian companies.

Forget about 240. It’s just a number. We can see some changes in electoral policymaking, but they are unlikely to impact economic policies.