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Published: May 28, 2024
Updated: May 28, 2024

PM Modi Needs 303-Plus Seats to Sustain Stock Market Rally: Investor Insights

Stock Market's Record Rally Hinges on Election Results

Indian stocks have surged to record levels, with currency and bond markets also reaching their highest points in over two months, just days before the election results on June 4. According to a Bloomberg News survey of market participants, Prime Minister Narendra Modi’s party needs to secure more than 303 seats in the general election to sustain and extend this rally.

Impact of Election Results on Market Performance

A Bloomberg News survey of 32 asset managers, strategists, and dealers indicates that if the Bharatiya Janata Party (BJP) wins fewer than 303 seats, the NSE Nifty 50 Index could drop by about 2%. Conversely, surpassing the 303-seat mark from the 2019 elections could lead to a 3% gain in the benchmark stock index. This potential for a significant victory is seen as critical for advancing key economic reforms in land acquisition and labour, which are vital for accelerating India’s economic growth.

Investor Sentiment and Market Volatility

Despite expectations of a third term for Modi, low voter turnout and reports of tight contests have dampened enthusiasm. "If he were not to win, that would create some uncertainty and put some pressure on valuation," said Henry Mallari-D’Auria, CIO for global and emerging markets at Ariel Investments LLC. Nevertheless, there is currently little uncertainty about the election's outcome, with Indian equities and the currency market experiencing increased volatility as results day approaches.

Foreign Investment Trends and Market Comparisons

Global funds have withdrawn $2.9 billion from Indian shares this month, with Indian equities underperforming compared to their Asian counterparts. High valuations, at about 20 times 12-month forward earnings, coupled with election uncertainties, have deterred foreign investors. The 30-day implied volatility on the National Stock Exchange has more than doubled since April, while volatility in the dollar-rupee options market has steadily increased since the election began.

Potential for Significant Market Gains

Some analysts foresee substantial market gains if Modi's party and its allies win more than 400 seats. Firms like JM Financial Ltd., Emkay Investment Managers Ltd., and UBS Group AG predict the ruling alliance will secure over 300 seats. However, UBS cautions that a change in government could see Indian equities revert to pre-Modi valuations, around 15 times one-year forward earnings. George Boubouras of K2 Asset Management anticipates a "double-digit positive rally" if the BJP wins more than 400 seats, driven by strong economic momentum and a growing global trade footprint.

The Election’s Crucial Role in Market Trajectory

As election results loom, the outcome will be pivotal for the Indian stock market's future direction. A strong victory for Modi’s party could propel the market to new heights, while a smaller majority might lead to declines. Investors are closely watching the results, with many predicting substantial gains if the BJP exceeds expectations.