India's 2024 election results were unexpected, with Modi's BJP remaining in power but falling well short of a majority. Peeyush Mittal of Matthews Asia gives us an insight into what happened below and how this political shift brings with it uncertainty and volatility ahead as the government takes shape.
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In India, whenever a coalition is needed to form a government it brings uncertainty and usually a pause in the current long-term policy and that is the case now. With a more fragmented government, policy making in general is going to become more difficult. And given the results of the election, we think there will be more populist policies going forward to drive consumption while infrastructure spending with private capex is likely to take a breather.
There are strong, long-term drivers in India in terms of demographics, its place in world trade and its rapidly developing industrial and manufacturing capacity. These structural growth agents we think are still intact and in play. However, these areas need a leader with a clear mandate to harness them and drive policy and, therefore, how the coalition government takes shape will be crucial.
What does it mean for Indian equities?
We expect volatility to continue as the next government takes shape. Markets will then likely stabilize, in our view. However, we expect sectoral leadership to change in favor of consumption stocks away from capex-led themes.
We think capital goods and infrastructure-related sectors spanning industrials and materials will face headwinds in the near term and associated stocks will likely be negatively impacted. There are grey areas like power and defense which should be less affected as these are less sensitive to partisan issues. But it will be consumption-related sectors like consumer staples, traditionally strong areas like pharmaceuticals, and other areas that may be more favorably looked upon by an evolving coalition that could fare the best in the coming weeks in our view.
A cognizance for quality by the market, which has been absent for a number of months, should also return, which is a good thing. We do expect likely prolonged volatility in small and mid-cap companies given the elevated valuations of these stocks in recent months and the potential uncertainty around continuity of domestic retail flows into investment vehicles.
What are your other concerns?
Consumption growth has continued to be weak despite strong GDP expansion over the past two years in India. This implies the benefits of economic growth are still not resulting in enough employment opportunities for the lower income groups. For GDP growth to be sustainable, we think consumption growth has to improve going forward. There is also uncertainty around capital gains tax. There could be increases in both short term and long term capital gains taxes, which would likely disappoint overseas investors if that were to happen.
Peeyush Mittal
Portfolio Manager
Matthews Asia
Source: *Bloomberg, 6.4.24