Market volatility peaks despite brokerage confidence in Modi government's victory

Most brokerages still expect that the National Democratic Alliance (NDA) led by PM Narendra Modi will comfortably form the central government for the third straight time.
(File Photo)
(File Photo)

Despite increased volatility in the stock market over concerns related to the general election outcome that is due on June 4, most brokerages still expect that the National Democratic Alliance (NDA) led by PM Narendra Modi will comfortably form the central government for the third straight time.

“Amid concerns over policy continuity, we expect the BJP to comfortably retain its majority in the ongoing Lok Sabha general elections…Based on our assessment of major states on Pan India basis, we see a net incremental loss of 4 seats to 299 for BJP in our base case while our bear and bull case seat tally is in a narrow range of 290 to 310,” said analysts at JM Financials on Tuesday.

The volatility index, India VIX, rose over 5% intraday on Tuesday to hit a fresh two-year high of 24.48. The index, which measures the market's expectation of volatility in the next 30 days, has been going up since the 2024 Lok Sabha elections took off last month.

In one month, it has surged 124% as lower voter turnout in six phases completed so far has raised questions about whether the ruling party would win a strong margin which is necessary for the continuity of market-friendly policies.

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"As the market approaches the election outcome, the uncertainty-led volatility is likely to continue. However, the underlying earnings growth for the March quarter results so far was largely above expectations, which could support the valuation, currently moderately above the long-term average," said Vinod Nair, head of research at Geojit Financial Services.

Emkay Investment Managers (EIM) on Tuesday said that an expected return of the NDA regime with a base case scenario of 330 seats will result in policy continuity and support positive sentiment in the Indian markets.

With an expected earnings growth of 15%, the brokerage expects Nifty to reach 24,500 by December 2024. Nifty is expected to further scale in upward mobility to surpass the level of 26,500 by December 2025, added EIM.

Manish Sonthalia, Chief Investment Officer of EIM said, “BFSI, PSUs, and industrials are expected to do well. BFSI has led the earnings growth and seen a correction in valuation. Investment-related themes will come into play with power capex building up in the next 3 to 5 years.”

The benchmark Sensex closed the Tuesday session at 75,171, a decline of 220 points, while the Nifty50 index ended the session at 22,888, a drop of 44 points. Besides elections, the Indian markets have been jittery due to continuous selling by foreign portfolio investors (FPIs).

Most brokerages also feel that a win by the opposition INDIA Alliance might lead to a sharp correction as a focus on populist policies won’t be able to justify the high valuation of local equities.

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Global brokerage UBS on Monday highlighted four scenarios of the election outcome and said that the INDIA alliance coming to power is a big negative for equities. It added that stock market valuations may get derated in this scenario and a test of pre-NDA valuation multiples is likely.

Though UBS said that the probability of the BJP getting more than 272 seats is high, the actual progress made by the ruling party in the first five phases of the election has been less clear.

The lower voter participation so far and possible loss of some voter share in key states such as Maharashtra, Karnataka, West Bengal and Bihar due to regional political uncertainty have raised questions about the NDA's ability to secure a third term, UBS stated.

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