Election results and beyond: What could keep India’s stock market going?

General Elections 2024 are over and the incumbent New Democratic Alliance (NDA) alliance has formed the government for the third time under the leadership of Prime Minister Narendra Modi, albeit with the support of coalition partners after the Bharatiya Janata Party (BJP) fell short of a majority mark of 272. The market was not prepared for coalition government politics in the Modi 3.0 term, after two terms with a full majority, resulting in mayhem at Dalal Street with the benchmark indices Sensex and Nifty 50 falling by 6% and the volatility index India VIX surging by 24% in a single session on the election results day (June 4). However, the market rebounded strongly by more than 7% over the next nine sessions, with the benchmark indices hitting fresh record highs, reflecting the market's resilience and investor confidence in India’s growth story. The market sentiment was lifted as the BJP retained the key ministries such as finance, railways, highways, defence, ports and shipping, corporate affairs, and commerce and industry, signalling continuity in policies.

Going ahead, according to market experts, stability within the coalition government at the centre will be the key trigger for Indian equities in either direction. The coalition government politics is expected to pose some challenges to the premium valuation of the market as it is already trading at a higher valuation than its peers emerging markets (EMs), which was based on the expectations of political stability and policy continuity.

In the near term, market attention is expected to centre around the economic agenda of the new government, Union Budget, progress of the monsoon, and institutional funds flow.

Does the seat count matter for the market?

According to Morgan Stanley, with the exception of finance bills, which need only a majority in the Lower House to pass (>272 seats), most changes to laws need the approval of both houses. In the Upper House, the NDA is currently slightly short of a majority. Additionally, many of the legal changes that are likely to be contemplated by the incoming government are either state or concurrent subjects and would therefore need the approval of the relevant state assemblies, it says in a note.

The foreign brokerage opines that the most important aspect of the BJP-led NDA retaining its majority is policy predictability, which will influence how growth and equity returns pan out in the coming five years. “With government continuity now in place, we believe the market can look forward to further structural reforms, giving us more confidence in the earnings cycle. Macro stability with rising GDP growth relative to real rates should extend India's outperformance over EM equities.”

Domestic brokerage Prabhudas Lillladher says in a report that the NDA government is in power with support of around 300 MP’s, but it is not a single party majority government. “While India saw 25 years of coalition rule before 2014, the success of BJP and PM Modi in running a minority government will be at test, although continuity in key ministries is a positive.”

Axis Securities in a note says that policy reforms are likely to continue in Modi 3.0 but some positioning is likely to shift towards populist measures which could likely pose challenges on the fiscal prudence path. “We expect the focus in the Modi 3.0 term will continue on infrastructure building, manufacturing, road & railways, and other crucial capex. Its overall focus would also be on creating more jobs and achieving investment-driven growth,” the brokerage opines.

The brokerage adds that some reforms or policy allocation could be possible for the bottom of the pyramid to address the rural challenges. This could be positive for the consumption sector which has seen muted growth for the last couple of years.

What lies ahead for market?

After witnessing a knee-jerk reaction post-Lok Sabha election results, India’s equity market touched new all-time highs, erasing all concerns related to the change of power at the centre. The BSE Sensex surged 7.2% in the past ten sessions, hitting a fresh record high of 77,366 in intraday trade on June 19. In a similar trend, the NSE Nifty rallied 7.6% during the same period, attaining a new height of 23,579 on June 19. Both the benchmark indices have been on a bullish trajectory, hitting seven new highs in June alone. In the calendar year 2024, Nifty registered record highs on 32 occasions, as investors’ confidence in future growth and moderating volatility, especially compared with other emerging markets equities, along with rise of the retail investor participation drove the market higher.

Another positive for the market is that the India VIX, which gauges stock market volatility using the Nifty 50 index, has declined sharply by 58% in the last ten sessions from its peak of 31.71 on June 4, to 13.7 on June 19. This indicates that investors are less fearful and expects minimum volatility in the stock market in the coming days, amid hopes of stable government and continuity in the policy framework.

Going ahead, Morgan Stanley Research predicts that the Indian economy could surpass Japan and Germany to become the world’s third-largest by 2027. In parallel, the domestic stock market is on track to rank third in the world by the end of this decade. The agency expects Sensex to reach 82,000 mark within the next 12 months, an upside potential of 6% from the current level, driven by stronger-than-consensus earnings growth.

According to the foreign brokerage house, the market’s confidence in India’s growth picture has driven stock valuations higher, discounting expectations of future cash flows at lower rates of return.

Domestic brokerage Prabhudas Lillladher expects Nifty to reach 25,816 in the next 12 months, saying that progressive budget, normal monsoons and strong inflows will further re-rate markets.

Another domestic brokerage, Axis Securities has given Nifty target of 24,600 by valuing it at 20x on Mar’26 earnings. The agency believes that the money may flow towards largecap stocks in the near term, recommending investors to remain invested in the market and build a position in high-quality companies (where the earnings visibility is quite high) with an investment horizon of 12-18 months.

Will high valuations tame bull run?

The market capitalisation of BSE-listed companies touched a new record high of ₹437 lakh crore on June 20 as benchmark indices continued their record-breaking spree. Over the last one year, the benchmarks Sensex and Nifty have delivered stellar returns of 22% and 25%, respectively. Outperforming the benchmark indices, the broader mid and small caps indices surged over 60% each during the same period.

The remarkable rally propelled India stock market’s price-to-earnings (P/E) ratio to 24.4 (as on June 18, 2024) as compared to emerging markets and all world stocks’ PE ratio of 14.37 and 19.76, respectively, which can be considered “Overvalued”.

Morgan Stanley in its report says that India's high P/E (albeit still lower than previous bull market peaks) is a source of constant debate as to whether the India story is in the price. “The market may have largely priced in expectations for growth tied to leadership continuity, but we see a number of reasons, such as growing domestic investment in equities, improving social equity and a fast-evolving tech sector, that support earnings cycle growth and a corresponding lift to share prices,” Ridham Desai, Morgan Stanley’s Chief Equity Strategist for India, was quoted as saying in the report.

“These and other changes that could boost earnings 20% annually for the next five years still aren’t baked into share prices,” says Desai.

According to investment bank and wealth management firm, this bull market is “ageing”, but it is still young in terms of returns, especially because of some distance for the earnings cycle to go, driven by changes already underway in the country. “Valuations, in particular market cap to GDP, appear to be stretched, but then share prices have barely kept pace with earnings over the past 3-5 years, whereas we remain in an earnings upcycle,” it says in a note.

The foreign brokerage sees benchmark Sensex hitting a level of 82,000 in the next 12 months on a base case scenario. This level suggests that the BSE Sensex will trade at a trailing P/E multiple of 24X, ahead of the 25-year average of 20x. “The premium over the historical average reflects greater confidence in the medium-term growth cycle in India, India's lower beta, a higher terminal growth rate and a predictable policy environment,” it says.

The agency in its report says that the market is certainly not in the mood to offer stocks "cheap" when it has an inkling of the ongoing profit boom. This does not mean that the relative price-to-earnings (PE) premium cannot fall – but it may need a macro or political crisis, and then the foreign bid which is waiting for such a correction may become even more reticent.