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

BSE Midcap and Smallcap indices have fallen 3 per cent and 4 per cent for the week, respectively, while investors have turned poorer by nearly ₹10 lakh crore in a week as the cumulative market capitalisation of BSE-listed firms has dropped to nearly ₹396.6 lakh crore.

Nearly 350 stocks in the BSE 500 index fell 1-23 per cent during the week.

The Indian stock market is experiencing significant volatility, as evidenced by the India VIX index, which surged by over 26 per cent this week.

“Domestic equity markets are seeing heightened volatility due to concerns around the electoral prospects of the ruling NDA government. While initial projections were that the BJP would easily cross its existing tally of 303 seats in the 543-member Lok Sabha, more recent projections of a sub-300 tally have caused jitters in the market,” said Madhavi Arora, Lead Economist at Emkay Global Financial Services.

The 2024 Lok Sabha polls are underway, spanning seven phases nationwide, with results slated for announcement on June 4.

While the market has largely priced in the return of the incumbent government to power, there remains some apprehension regarding their ability to secure a decisive majority, which is essential for confidently pursuing promised reforms.

Also Read: Expert view: Unexpected election outcome could disrupt Indian stock market, says Trivesh D. of Tradejini

What’s the market discounting?

Low voter turnout seems to have made investors cautious about the election outcome. However, most experts still believe the current government will continue after the election.

“From a capital market perspective, the broader consensus is that the current government is well-poised to continue its tenor after the elections as well. A debate can happen about whether they will reach their desired targeted seat number, but we believe that this government is positively poised to continue,” said Pradeep Gupta, Co-founder & Vice-chairman at Anand Rathi Group.

According to Vishal Jajoo, co-fund manager at ITI Mutual Fund, the equity market is fully factoring in a third term for the current government.

“It would be difficult to put a number as to how many seats the current government will bag, but one must appreciate that the existing government getting a majority for the third straight term is remarkable,” said Jajoo.

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Apurva Sheth, the head of market perspectives and research at SAMCO Securities, sees a 70 per cent probability of the NDA winning seats in the range of 272-400. In this case, the market may see a nearly 2 per cent rise. There is a 20 per cent probability that NDA will get more than 400 seats in the Lok Sabha election 2024. According to Sheth, the Nifty may rise about 5 per cent if this happens.

However, Sheth also underscored that there is a 10 per cent probability that NDA will not get the full majority, following which the Nifty may fall as much as 10 per cent.

Will the selloff continue after the result?

A negative surprise can attract a knee-jerk reaction in the market, but most analysts believe the selloff could be short-lived, and the market will come back to focus on domestic fundamentals and global cues.

“During elections volatility generally trends higher in the last leg of polling. It peaks out once the results are announced. Normally, Nifty 50 and S&P 500 move hand in hand. We believe that Indian markets should bounce back in line with their American peers and trend higher after the correction,” said Sheth.

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Gupta of Anand Rathi Group pointed out that in the past, there have been instances when the election results have not been as per stock market expectations. For example, in 2004, there was a change in the government, which was not aligned with the market expectations and led to a fall in the stock market. Over a period of time, we witnessed the markets recovering and moving on an upward trajectory.

Gupta said that India’s growth story looks robust, and strong GDP growth will drive sustained long-term returns for investors. However, markets may see volatility in the near term, and investors should use dips to build their portfolios.

“If we look at the past history, election years have been positive for market performance with a strong performance in the run-up to elections as well as 6 months and one-year after elections. With the likelihood of a stable government at the Centre, this trend could play out in 2024 as well,” said Gupta.

However, Gupta also highlighted that valuations are not cheap for many companies, at 20 times one-year forward earnings.

Other factors should also be considered, such as earnings momentum being slow in certain sectors, and interest rate cut expectations in the US being toned down. Moreover, Middle East tensions could pressure oil prices and affect commodity markets domestically. The strengthening of the US dollar is also negative for emerging market equities.

“Markets are driven by short-term sentiments and liquidity. Any change in market expectation can trigger short to medium-term volatility, which is anticipated,” said Gupta.

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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: 10 May 2024, 06:05 PM IST