How Does The 2019 General Election Results Alter The Market Dynamics For India?

The stock market indices and the share price of the companies listed on these indices constantly keeps changing due to company related factors and market-related factors. The company related factors are usually its annual performance in terms of revenue generated, market size captured, innovative product/service offered, capturing various synergies that derive its value on the index, etc. The key elements that drive the market-related factors are the macro events that take place which dictates the direction in which a particular company or the whole industry tends to move towards.

The prominent macro events such as inflation, monsoon, trade policies, financial factors, trade war, oil prices, global markets etc. are a few to name. But, one of the most crucial factors is the government that is ruling the country as it’s the epicentre of all the policies, reforms, schemes and decisions made in the country which acts as an indicator of the road which is ahead to come. Hence the importance of the motto and ambition of the incoming government is so crucial. However, the market overall will tend to thrive in the long-run irrespective as to which government comes into power.

As seen in the table below are the annual returns derived by the BSE index over the tenor of the ruling government. Here, it’s clearly visible that the returns derived from the market index have more to it than the party ruling the government.  

The markets always hope for a stable government at the Centre so as to have consistency and stability in the economy as the government is the sole authority of framing the prominent economic policies of India. The foreign players generally prefer to invest in economies that have a stable government with strong policies with long-term visibility. The Indian equities have witnessed foreign inflows worth a net of $6.7 billion from January to March, which is more than the outflows of $4.4 billion in 2018. This optimism has kept foreign investors bullish on India and the market is benefitting from huge emerging market inflows.

India is set to emerge as a USD 5 trillion economy over a period of five years and as a USD 10 trillion economy eight years after that. This gives a clear indication of the growth prospects and the sectors in which the opportunities will arise on these lines. In terms of fundamentals of the country’s economy, its inflation has come down from over 10% five years ago to about 4.6%, the fiscal deficit has come down from almost 6% to 3% which are very important indicators. We have already grown in the last five years from being the 11th largest economy in the world to the sixth. This has led to ease in the monetary policy (which we already have started to witness) which in turn can boost consumption.

To attain this kind of scales, the country needs inclusive and sustainable growth. And for this, the focus needs to be on physical and social infrastructure. The government has been taking a number of initiatives to address and correct the imbalances in both the economic growth and development of the country. BJP’s election manifesto this time around was focused on infrastructural development which has already started to witness growth from the ground level during their last tenor.

The government is expected to make a capital investment of Rs 100 lakh crore by 2024 in the infrastructure sector as well as announce a new industrial policy to improve the competitiveness of manufacturing and services. This has given a more optimistic outlook going forward. Hence, companies of sectors such as Infrastructure, Power, Capital goods, Manufacturing and Construction will witness significant progress and growth over the government’s next tenure. Some sectors such as FMCG, IT, Metals. Pharma keeps growing irrespective of the election cycles.

With the progressive economic steps of implementing Goods & Service Tax, De-monetization, the government looks to roll out further steps to organize and streamline the conduct of businesses and trades. Hence it would advisable to avoid the sectors or companies which have an unorganised structure and a low sustainability business model.

The Modi government’s return to power is likely to propel the agriculture sector stocks as well. New agricultural reforms, policies, financial aids availed to the farmers and the export policies and incentives has improved the quantity and quality of the output which can be used for domestic consumption as well as for exports.  This will leave more money in the hands of farmers which will be spent on buying tractors, cars and two-wheelers in the rural market.

The power sector has also witnessed a significant improvement in energy deficit situation over the last four years of the tenure. The country’s energy deficit, which remained in the range of 8% and 10% during 2011-13, has improved in FY14 to 4-4.5%, and subsequently contracted to a mere 0.7%.

With the implementing of Housing for All, Rural Development & Electrification, Smart City Projects, development of roadway and waterway connectivity, and many such policies being already rolled on and many being in the pipeline as well, industries that have been directly linked with these schemes and policies such as construction, building materials and accessories etc. will directly benefit from the same.

Banking sector stocks are also likely to rise since sales in the auto sector, demand for housing loans and agriculture loans will lead to a rise in their loan books. The re-organisation of the increased banking NPA’s has also propelled these stocks towards profitability. Also, banking stocks have been at the forefront of almost all rallies on the benchmark indices.

The Make in India policy and Start-up incentives provided by this government is expected to increase the employment opportunities in this market. With the kind of global recognition India is gaining throughout has been reflected by the way other economies and government is viewing India as an investment destination. This has led to strengthened relations with major member nations giving the country a much greater economic, financial, technological and political horizon to look forward to.

Though many of the investors have a different philosophy and they prefer not to try and time the stock market. They prefer to stay invested for a long time and usually have a diversified portfolio which can smoothen the impact of the immediate volatility of the market. However, analysis of this event helps to not only smoothen the immediate impact of the volatility in the market but also helps to plan the portfolio reshuffling. Thus, understanding the vision and policy-making of the government over the next tenure will help to identify the sectors that will grow in the upcoming tenor and investing in the most efficient business model of the company in that particular sector can give the investors multi-beggar returns. 

Author
Dhrumil Wani
Team Leader – Equity Research & Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

Connect with Dhrumil on LinkedIn



Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s