India Elections Keep Investors on Edge

India's elections draw to a close this week and investors fear that there will be stock market volatility if Narendra Modi's party loses its majority

Holly Black 21 May, 2019 | 2:36PM Larissa Fernand
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India elections

India’s election draws to a close this week and exit poll results suggest Prime Minister Narendra Modi is on course for a second term in office – but what does this mean for emerging markets investors? Morningstar Indi

Modi has been widely credited as being the driving force behind major reforms in the country since he was elected in 2014. The Prime Minister has introduced taxation measures to curb the use of fraudulent money, taken steps to rein in inflation, standardised sales tax and invested heavily in infrastructure.

As the economy has boomed and a flood of investor money has come to the country, India’s stock market, the Sensex, has soared 57% from 24,693 to 38,969 points over the past five years. But, after years as the darling of the emerging markets world, the market has lagged its peers in the months leading up to the current general election.  That’s not helped by the long process of an election in India, which is held in seven phases from April 11 to May 19 before a final count on Thursday. The BSE Sensex jumped 1,500 points yesterday (Monday 0) to more than 39,000 points on early exit polls, and looked set to break its closing record high on Tuesday before dropping back below 39,000.

Many investors have been concerned that the good work of recent years will be undone if Modi fails to keep his majority. Neelkanth Mishra, co-head of Asia Pacific equity strategy at Credit Suisse, tells Morningstar India editor Larissa Fernand that investors should not over-emphasise the importance of the elections, however. He says the only impact that can be seen is over the long-term when policy changes are taken into account.

There might be short-term falls, of course. When the United Progressive Alliance (UPA) emerged as the surprise winner of the Indian election in 2004, the stock market plunged over the following two days amid fears of an economic slowdown and doubts over whether or not reforms would continue under the new Government. However, the market did not languish at that level for long – the Sensex delivered a 17% absolute return over the 12-month period beginning six months before polling started.

Other research, from India Spend, found the Nifty index and Sensex were both higher six months after the past four general elections – in 1999, 2004, 2009, and 2014 – compared with six months before the elections.

Waiting for May 23

So, what can investors expect this time? Much will depend on the outcome; while the exit polls indicate a Modi victory and a continuation of the BJP-led NDA government is likely, the result will remain unknown until the final count on May 23.

A change in government could create some market volatility and this could be more extreme if the Third Front – a coalition of regional parties – comes to power. A stable government committed to economic reforms is the outcome which will most please the stock market.

Ian Hargreaves, manager of the five-star rated Invesco Asia Trust (IAT), says: “The market appears to be increasingly confident that Prime Minister Modi will be returned to power, but the BJP party is unlikely to hold on to its convincing the majority. A degree of market volatility around India’s election is unsurprising, but the result does not overshadow our long-term view and we doubt that there will be any significant change in economic policy.”

Indeed, India looks set to continue economic growth of 6-7%, the Sensex recently reached a record high and the rupee is stable. This is despite the decline in earnings growth posted by some companies. The oil price has also stabilised, which is key to India as a major importer of the commodity.

Hargreaves says some of the best investment opportunities are in private banks, such as HDFC Bank and ICICI Bank, which has stronger balance sheets than state-owned enterprises and are less exposed to stressed loans in the steel, power and infrastructure sectors. “They also have stronger governance and are more competitive, investing in areas such as technology, which leaves them better placed to engage with customers and gain market share,” he adds.

Kristy Fong, manager of the four-star rated Aberdeen New India (ANII) investment trust, likes companies with a domestic focus. Real estate and materials firms, she says, are well-placed to benefit from infrastructure and affordable housing developments as well as tax and interest rate cuts. The trust, which trades at a 12.6% discount to net asset value, invests in Housing Development Finance, a provider of finance for housing in India, as well as Mumbai-based UltraTech Cement.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
abrdn New India Investment Trust Ord794.00 GBX0.25Rating
Invesco Asia Ord328.00 GBX1.23Rating

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Holly Black  is Senior Editor,


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