Can Indian stock market crash further before Lok Sabha election result?

The recent surge in volatility in the Indian stock market may persist for the next few weeks, and the benchmark Nifty 50 may correct for another 2-3 per cent in the coming weeks, driven by the prevailing uncertainty surrounding the outcome of the Lok Sabha election on June 4th, according to experts.

Market experts, however, remain upbeat about the medium-to-long-term prospects of the Indian stock market as they believe volatility due to election outcome would be short-lived, and investors should buy quality stocks during the crash for the long term.

Experts, LiveMint spoke to expressed anticipation of sustained high volatility leading up to the election outcome. They underscore that the market sentiment may continue to be delicate owing to various factors, including elevated valuations, lacklustre Q4 performance, evolving geopolitical landscapes, and the absence of significant positive catalysts.

Nifty is down over 4 per cent from its all-time high level of 22,794.70, which it hit on May 3. Some experts expect the index to see more correction.

On Monday, May 13, Nifty 50 fell over a per cent to 21,821 in intraday trade, while India VIX jumped over 16 per cent to hit its fresh 52-week high of 21.49.

Also Read: Stock market crash: Why is Indian stock market down today? — explained with 5 major reasons

G. Chokkalingam, founder and the head of research at Equinomics Research Private Limited believes the Sensex and the Nifty 50 may not see a major crash beyond 2-3 per cent in the next three weeks. However, the mid and smallcap segments may suffer deeper losses.

“The market will remain under pressure for the next three weeks, and the Nifty 50 may fall for another 2-3 per cent. The smallcap segment may lose another 10 per cent,” said Chokkalingam.

“Historically, we have seen the market tends to turn volatile ahead of the election outcome. We expect volatility to continue in the next three weeks. Nifty may correct 3 per cent from the current levels, and the midcap and smallcap spaces may see a correction of 5-6 per cent,” said Pankaj Pandey, Head of Research at ICICI Direct.

While the market may have already fairly priced in the return of the BJP-led NDA to power after the 2024 Lok Sabha election, market nervousness remains palpable.

“Given the absence of positive triggers, the market will likely remain weak. The ongoing general elections are weighing on the market, with the market participants watching the margin of win for the incumbent BJP-NDA government,” said Atul Parakh, CEO, Bigul.

Also Read: Lok Sabha Election 2024: Market erases nearly ₹10 lakh crore in a week; will the selloff continue after result?

Election jitters not the only factor

While nervousness ahead of the Lok Sabha election outcome is one of the most significant reasons behind the current market volatility, experts say several other factors, including rich market valuation, the geopolitical situation, sticky inflation and the absence of fresh, positive triggers, have kept the market sentiment low.

“Given the high valuations in several small and midcap spaces and the ongoing Middle East war, fears about inflation and the postponement of rate reduction by most countries have led to overall instability worldwide. Therefore, the markets may be volatile in the near future,” said Diwakar Rana, a senior equity research analyst at Prudent Equity.

Some analysts pointed out that the Indian stock market is witnessing strong foreign capital outflow, making domestic investors nervous.

“The pressure on the Indian stock market is mainly due to FII selling. This month, FIIs have already sold nearly ₹25,000 crore in cash. This is not because of their concerns regarding the election outcome. That is because of the change in trade from ‘sell China buy India’ to ‘sell India buy China’ because of some marginal Chinese economy,” said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Vijayakumar underscored that due to sustained selling in the Chinese market, which started almost a year ago, the valuations are very cheap, unlike the Indian market.

“The PE ratio (price to earnings ratio) of the Hang Seng index fell below 9; for the Shanghai Composite Index, the PE is around 10. The PE of the Indian market is above 19. The relatively high valuations of India have triggered selling in India and buying in China,” said Vijayakumar.

Market hopes for a BJP win

Experts believe the market is still expecting the return of the BJP-led NDA to power. A negative surprise can upset the market.

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Shiva Subramaniam, IC member and asset class lead at Whitespace Alpha said an expected win by the NDA would be positive for the domestic market, indicating continuity in the policy of investment in infrastructure, manufacturing and prudent fiscal management. However, a narrow win for the NDA may result in short-term market pain but positive overall. The market may see a steep correction if the opposition coalition comes to power.

However, the market will gradually shift focus to macroeconomic prints, inflation, rate cut dynamics and geopolitical developments.

Vishal Jajoo, co–fund manager of ITI Mutual Fund, said the stock market has generally responded favourably to election results. However, there is the likelihood of some short-term volatility in the months preceding the election. However, given the strong fundamentals, markets may likely continue to remain robust over the long run. More importantly, the India story will play in the long term.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

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Published: 13 May 2024, 01:57 PM IST