Historically, election periods have been positive for benchmark indices, especially in the initial months. However, this time, market participants are unusually nervous. So far this year, both Sensex and Nifty have risen only 2.4% and 3.5% respectively until last weekend, marking the worst performance since 2004.
This modest gain is largely due to recent sessions where market sentiment improved. Notably, the India VIX, which measures expected volatility for the next 30 days, has surged by 40% to 20.5. In previous week on Monday, Nifty 50 fell over 1% to 21,871 in intraday trade, while India VIX jumped over 14% to hit its fresh 52-week high of 21.49.
Looking back, apart from the 2004 elections when markets were negatively impacted by the Iraq war, election periods have generally been favorable for stock investors. Previous Lok Sabha elections followed relatively weak market periods, but this time follows a bumper year, making the odds less favorable.
Multiple factors at play
Several factors are contributing to the current market jitters. At the beginning of the year, bulls were confident of a strong mandate for the incumbent government in the upcoming elections and anticipated rate cuts by the US Federal Reserve. However, these expectations have not materialized.
There is now uncertainty over the number of seats the required government will secure, and the Federal Reserve has delayed rate cuts. Additionally, geopolitical tensions in the Middle East and China’s resurgence as an investment destination are adding to the market’s general sense of uneasiness.
As a result, investors, especially foreign institutional investors, are pulling back. In May alone, FIIs have sold shares worth around Rs 28,500 crore, making it one of the worst months in recent years for foreign fund flows. Experts suggest that if interest rates remain high throughout the year, Indian equities may not attract FIIs due to high valuations. However, a strong domestic economy, increased private capital expenditure, and robust earnings growth could lure FIIs back.
Earnings growth: A crucial growth factor
Earnings growth is seen as a crucial factor for future market performance. While the March earnings season met expectations, many believe current valuations are still too high. Union Home Minister Amit Shah remains optimistic about the market’s future, and has advised investors not to link recent market movements to the 2024 general elections, suggesting they buy stocks before June 4, anticipating a market surge post-election results.
As the fourth phase of the ongoing elections continues, Nifty has declined in six of the last seven sessions. However, Shah appears unfazed by the prevailing market uncertainty regarding the election outcome, maintaining a positive outlook for the domestic stock market.
