 "Seshadri Sen, Emkay Global")
Exit polls indicate a comfortable win for the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) in the 2024 General Elections, with most agencies predicting a 350+ majority for the ruling alliance in the 542-member house.
This could trigger a short-term rally in the Indian equities as money waiting on the sidelines rushes in – not just foreign portfolio investors but also the domestic institutions, which have been in low-risk mode. More importantly, it is likely to set the stage for a long-term bull market with a sustained multi-year compounding returns on the back of steady economic growth and strong macro fundamentals.
The most obvious positive for the markets is continuity. Ten years of the Narendra Modi government have set expectations and given a framework for investors. Any disruption to that predictability would have upset investors and driven a quick derating.
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Specifically, two factors have stood out. First, this has been a period of unprecedented financial stability. Despite the massive disruption from Covid, India’s macro-financial environment has been resilient. The twin deficits are well under control, bank and corporate balance sheets are stronger than ever, and all the financial markets (equities, bonds, forex) are robust.
Secondly, the quality of government spending is improving with a shift away from revenue to capex, which has stronger multiplier effects on growth in the long term.
The BJP manifesto gives us some useful pointers on NDA’s agenda in its third term. The focus on infrastructure-building is expected to continue, with roads, railways, green energy, and affordable housing mentioned in the document.
The support for domestic manufacturing would also continue – Autos/EVs, electronics/semiconductors have already seen some momentum and the manifesto further mentions textiles and pharma APIs.
In the social sector, the government would continue its outcome-based agenda over subsidies: piped gas, rooftop solar and lower healthcare costs are three (of many) areas identified.
This is a different macro cycle from the previous decade. The economy has pivoted from services to manufacturing and from consumption to investments, and this trend should continue after the expected NDA victory. The change in macro direction has led to a democratsation of earnings and expanded the investible universe. The pool of companies with strong earnings growth backed by resilient balance sheets has gone up manifold, which is also driving the rally in small and midcap stocks.
There are short-term risks with pockets of elevated valuations still prevalent and a lukewarm earnings season (4QFY24) that just ended. Investors should stay exposed to Indian equities in the medium term and steadily deploy incremental capital.
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Disclaimer: Seshadri Sen is Head of Research and Strategist at Emkay Global Financial Services. Views expressed are his own.
