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In India, the election results indicate the end of single-party control in the Indian Parliament. After the majority of votes had been counted, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) emerged as the strongest party. Modi thus faces a third consecutive term in office. However, his party has not managed to secure a parliamentary majority on its own. This is the first time since Modi came to power ten years ago that he has to rely on coalition partners to form the next government.
A majority of 272 seats are required to govern in India. In the previous election, the BJP had won 303 seats and had 353 seats together with its allies – a whopping majority. Before this year’s election, Modi set the goal to increase this majority to more than 400 seats.
However, such an overwhelming victory failed to materialise. The BJP secured 240 seats. Combined with the National Democratic Alliance (NDA), they reached 293 seats.
“The election result will be a wake-up call for the government and could serve as an important catalyst for the government to refocus,” commented Kenneth Akintewe, head of Asian sovereign debt at abrdn on the Indian elections results.
India has several challenges to overcome. “Food inflation has been high, and the agricultural sector has struggled, while the government has also reduced subsidies, so a loss in support in agriculturally-oriented parts of the economy is not necessarily a surprise”, explains Akintewe. “Similarly, India has, at the surface level, experienced a high level of growth, but not everyone has benefited, and consumption has not actually been all that strong.”
Akintewe emphasised the importance of developing a robust manufacturing sector for India to create more well-paying jobs and continue implementing reforms that strengthen the economy. Furthermore, he thinks that privatising state-owned enterprises and asset monetisation could help transform the Indian economy.
Murali Yerram, Portfolio Manager at Franklin Templeton expects the drivers of India’s growth to continue to be centred on manufacturing, infrastructure and consumption.
“Although the result is disappointing and could have a negative impact on some market sectors, we do not believe it will change the policy direction of the BJP-led NDA. The focus will remain on developing the manufacturing base through the Production Led Incentives (PLI) programme, shifting infrastructure growth from public to private sector, focus on renewable energy and boosting consumption and a possible renewed focus on rural incomes,” Yerram said.
Some market experts do not expect changes in policies from the continued Modi government. “Even continuing with what we had so far, I think that is good for investors, and for business,” Financial Times quotes Alessia Berardi, head of emerging macro strategy at Amundi Investment Institute.
However, “with a more fragmented government, we believe policy making in general is going to become more difficult going forward,” said Peeyush Mittal, portfolio manager at Asia-focused asset manager Matthews Asia.
What the Indian election results mean for equity and fixed income
Indian stocks slumped on Tuesday as vote counts pointed to a disappointing result for Modi’s BJP. India’s benchmark BSE Sensex index, which tracks 30 large companies, and the broader NSE Nifty 50 index each closed down by almost 6%. However, after the Telugu Desam Party, a key ally, pledged its commitment to the National Democratic Alliance a day later, Indian stocks rebounded. The Nifty 50 index gained 3.4%, its biggest increase in more than three years.
“The unexpected (election) result could increase the volatility in financial markets,” opined Ryota Abe, Economist, Global Markets and Treasury Department, Asia Pacific Division at Sumitomo Mitsui Banking Corporation (SMBC).
“Nevertheless, India’s position in emerging Asia should not be much different from the current situation unless there is a change of government resulting from a change in coalition. The rationale is that geopolitical risk, which is a tailwind for India, will continue in the medium to long term and that the demographics remain unchanged”, he added.
The stock market’s negative reaction could also be a good entry point for investors, Bjoern Jesch, DWS Global Chief Investment Officer, said.
“We have argued before that from a longer-term perspective, investors might actually find value in this election outcome. It not only ‘humbles’ Modi, as the Economist writes, but might help to keep checks and balances of India’s democracy in a better state,” Jesch said.
For the near term, Federated Hermes sees a downside risk to equities in India as “valuations in small and mid-caps are lofty, and overall positioning in India is probably still on the higher side”. “There is likely to be some uncertainty as the incoming government will be a coalition of parties and, hence, risk around government policies/priorities,” the asset manager opined.
“Over the medium term, the prospect for stocks will depend on earnings trajectory. (…) Over the long term, reforms are crucial, and we are somewhat sceptical now that structural reforms in complex areas such as the farm sector and the Electricity Act will get done,” Federated Hermes added in a statement.
Looking at the bond market, history showed that the Indian election results have not had any significant impact on the Indian bond market, and asset managers see the investment case for India bonds remaining compelling over the medium to long term.
“In terms of the bond outlook, the election result doesn’t do much to derail this, with the supply/demand dynamic for bonds still very favourable and inflation and policy rates still biased to come down. Indeed, the kneejerk response of higher yields and some currency weakness could indeed be an attractive opportunity to add risk,” said abrdn’s Akintewe.
“With the index inclusion around the corner, it is noteworthy to compare the performance of India with emerging market bonds as well as global bonds. India has meaningfully outperformed both of these markets on a USD unhedged basis, in the past 10 years,” HSBC Asset Management wrote in a market analysis.
“We believe that there is a strong case for strategic allocations into India bonds. The asset class offers portfolio diversification benefits and value,” HSBC AM added.
