5 Post-Election Takeaways for the Markets 🗳️

The last week has been nothing short of a rollercoaster ride in the Indian markets - all thanks to the general election results.

First 3% up because of exit polls, then 6% down as counting progressed and ran chills down people’s spines, and then a full recovery and beyond in the three days after.

Everyone’s done their bit of post-mortem. But what’s next? Here are 5 things that are shaping expectations for what’s to come.

1. Lower Aggression in Spending

After years of heavy spending on capex, especially infrastructure, the government had been seen taking a step back, in the interim budget itself. Although the budget for capex was at its highest ever - the increase moderated to 11% (versus 30% before that).

The fact that BJP’s vote share loss was attributed to the more populist sect, there is a good possibility of the new government trying to please the masses, and bring its popularity back up.

This is exactly why stocks in the sectors of defence, railways, and other public sector undertakings (PSU) took a nosedive. These sectors had been on a winning streak in recent years, thanks to the NDA's aggressive shareholder-friendly policies.

2. More Populist Measures

In response to the electorate's demand for more immediate and tangible benefits, the government is likely to prioritise populist measures over broad fiscal expansion. The focus may shift towards policies that provide direct economic relief and social welfare benefits to voters.

This includes reallocating resources towards programmes that directly impact everyday lives, such as MGNREGA, PMAY, and other rural development initiatives. Yes, also subsidies for stuff that farmers need to buy and price supports for what they need to sell!

This shift might not be beneficial for infrastructure and related sectors, but it can boost consumption, explaining the up-move we saw in FMCG, auto (rural-focused), and other consumption-related sectors.

3. Slowdown in Decision-Making

The coalition nature of the new government introduced a layer of complexity. Unlike a single-party majority, a coalition requires consensus among various partners, potentially slowing down policy implementation.

With the lower-than-expected seat count, concerns arose about the government's ability to implement policy decisively. Now, with a coalition government, it feels like trying to steer a boat with too many captains, leading to delays and investor jitters.

This may result in an overall slowing down of policy initiatives and even slower execution of ongoing and planned projects - thereby creating downside risk on the benefits to corporate India, and hence earnings growth.

4. Higher Risk Premium

India might lose some of the valuation premium it enjoys as an investment market due to the perceived instability of a coalition government compared to the earlier single-party majority.

Historically, countries with stable, single-party governments have been seen as less risky, attracting higher investment. For instance, during Germany's coalition governments in the late 1990s, market confidence wavered, leading to increased volatility and a higher risk premium.

A coalition government often faces challenges in implementing cohesive and decisive policies, which can lead to investor apprehension. This could result in India being perceived as a riskier investment compared to its previous stable government setup, potentially increasing the equity risk premium, reducing valuations, impacting foreign investment flows, and resulting in a downward adjustment to that accord.

5. Long-Term Story Intact

Despite the initial market jitters, it's crucial to remember that there is no change in government. The NDA's continuity provides a sense of stability, and the long-term growth story of India remains intact.

While the market's reaction to the election results was swift and sharp, these events often fade from memory as new developments take centre stage. Investors would do well to focus on the broader economic trends and the government's long-term commitment to development, which continue to offer substantial opportunities for growth in the equity market.

In conclusion, while the past week's market movements were dramatic, they were driven by short-term sentiment and expectations. The long-term outlook remains positive, and investors should stay focused on their strategies, keeping in mind the inherent resilience and potential of the Indian economy.