CIO Update: A closer look at India's post-election market volatility

11 June 2024

India has concluded its 2024 national elections, an event that spanned 6 weeks, and which saw 642 million people flock to the polls to elect the country’s political leadership over the next 5 years. What many predicted as a certain outcome, has turned out to be far more complex, sparking a volatile market response.

In its aftermath, what can investors expect, and what should they be mindful of? While it’s likely we’ll see increased volatility in Indian equities in the near-term as the dust settles, our longer-term view on the country’s growth picture remains intact. Let’s take a closer look.

Putting India's post-election market swing into perspective

The results of India's recent general election came as a surprise, with Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) party losing its parliamentary majority. This called into question the economy’s long-run growth prospects, which has been a big force behind the run-up in India’s equities.

India's flagship NIFTY 50 index fell 6% on June 4, but started to recover the following day, gaining 3-4% as the markets digested the news.

Zooming out to the week prior reveals the bigger picture. In the chart below, you’ll see that investors piled into the country’s equities when early exit polls mistakenly forecasted a landslide victory for Modi’s BJP. But now, after the sell-off and subsequent recovery, the index is back above pre-election levels.

It's important to note that equity market volatility around elections isn't unusual – not just for India, but other markets as well. Historical data shows similar fluctuations in Indian equities following previous elections. As the new government takes shape in the coming weeks, greater clarity on economic policy may provide reassurance for investors.

The bigger picture: India’s structural drivers remain intact 

Given the potential for equity market volatility to persist in the near term, it's important to focus on the medium to longer-term picture for India – the time horizon that our ERAA® investing framework takes into consideration.

Our view is that the longer-term outlook of low double-digit earnings growth hasn't materially changed. That’s because the structural drivers behind India's growth story – which we covered in our October 2023 CIO Insights – remain intact:

  • Favourable demographics. India has a young and growing population, and a rapidly expanding middle class.
  • Global supply chain shifts. Companies are diversifying away from China, which has been supportive of India's manufacturing sector.
  • An independent and credible central bank, critical for keeping inflation in check.
  • The momentum of past reforms. This includes streamlining regulations, widening the tax base, and encouraging foreign investment.

The election outcome appears to have been influenced more by dissatisfaction with Modi's divisive social policies than his economic policies, which have played a crucial role in lifting the country's growth trajectory over the past several years. A new government is likely to maintain continuity in this regard. However, we will be closely monitoring some unknowns going forward:

  • Ability to pass tougher reforms. A less powerful Modi might make it more difficult to pass  tougher land and labour policy reforms, which are seen as key to further supercharging growth.
  • Potential for less fiscal discipline. A coalition government may mean the risk of more populist initiatives in order to gain political support – instead of focusing their efforts to lower the deficit or spend on infrastructure development, for example – which could also  potentially have knock-on effects on inflation.

Valuations suggest potential for near-term risk, but long-term opportunities remain

While India's long-term growth potential remains compelling, it's important to look at current valuations, especially in light of the recent volatility. The forward price-to-earnings (P/E) ratio for the MSCI India index, at 22.4x as of 5 June, is still 4-5% higher than its recent average (21.5x), and 15% above its 10-year average (19x). 

However, that’s not too dissimilar from the broader picture for global equities. The MSCI All Country World Index (ACWI), whose current P/E of 17.7x is also about 5-6% above its recent average (16.8x) and about 10% above its longer-term average (16.1x). On a relative basis, the P/E of MSCI India is also not unreasonable compared to the MSCI All Country World Index, or about 1.3x versus a 10-year average of 1.2x.

That suggests a potential near-term downside of about 5% for Indian equities if volatility persists. Should there be a deeper double-digit correction, India equities would become undervalued on both an absolute and relative basis. These corrections could present attractive entry points for long-term investors.

Ultimately, it's essential to maintain a broader perspective. While India's post-election market volatility may be unsettling for some in the near-term, the country's fundamental growth drivers are still in place. This is also why our ERAA®-managed portfolios are overweight on the asset class – and why we still think it’s worth considering investing in India over the longer-term.


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