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'In an election year, markets flourish'

By Sundar Sethuraman
February 23, 2024 09:11 IST
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'Historically, the markets tend to perform well during election years as governments aim to increase spending and call attention to growth.'

Illustration: Dominic Xavier/

About 36 nations, representing 63 per cent of global GDP are heading for elections this year.

"The market setup has never looked better, given a combination of stable policy, strong growth, and steady inflows from both domestic and foreign investors," Arbind Maheswari, head of India Equities at BofA Securities, tells Sundar Sethuraman/Business Standard in an e-mail interview.


What will be the impact of the challenging global growth outlook? Which sectors could face headwinds?

The US economy has proven to be far more resilient, as indicated by recent reports.

Currently, the largest drag on growth has been from China, where indicators continue to show a slowdown.

Sectors that could face headwinds would likely be restricted to commodities, where China has been the largest demand driver.

However, if the US economic growth narrative shifts towards a hard landing, then we see a risk to earnings for the metals, healthcare, and information technology sectors.

What are your expectations of market returns this year? Given the recent rally, will further gains be capped?

The market setup has never looked better, given a combination of stable policy, strong growth, and steady inflows from both domestic and foreign investors.

The starting valuations are higher vis-a-vis historical levels, which should translate into lower return expectations.

Markets could see temporary pullbacks as debates persist on the US hard and soft landing, the timing of the Federal Reserve pivot, ongoing geopolitical conflicts, and the impact on Indian markets of the expected China stimulus.

How was the October-December quarter (third quarter, or Q3) for India Inc? Is it on track to achieve the growth estimates for 2023-24 (FY24)?

So far, the National Stock Exchange Nifty is tracking a 2 per cent miss on consensus earnings in Q3FY24 (as opposed to beats for the past few quarters).

Q3 is tracking a 14 per cent year-on-year earnings growth so far, but given strong earnings delivery in the first half of FY24 (25 per cent Y-o-Y), the demand for the second half is low, and the Nifty appears on track to deliver on consensus earnings growth estimates for FY24.

What is your outlook for broader markets? Will smallcap and midcap rallies continue?

Smallcaps and midcaps (SMIDs) witnessed a sharp rally in calendar year 2023, delivering 45-47 per cent returns, massively outperforming the Nifty (19 per cent).

A large part of this SMID rally (approximately two-thirds) was liquidity-driven (supported by strong domestic flows), whereas, for the Nifty, this was led by earnings delivery.

As a result, valuations for SMIDs are now stretched at over one standard deviation level, while, in comparison, Nifty continues to trade closer to its long-term average valuations.

With heightened volatility in H1CY24, we continue to prefer largecaps over SMIDs.

Public sector undertaking stocks have rallied. What are the reasons for the rally, and will it be sustained?

One could attribute this to the government's strong infrastructure push, especially in sectors like roads, railways, defence, power, and broader infrastructure.

Besides, PSUs in general are seeing operational efficiencies and, as a result, are witnessing their valuation gap reduce compared to their private sector peers.

Ownership levels in the names have also been relatively low for an extended period.

What we are seeing now is a normalisation of both valuations and ownership in PSU names.

While markets are reacting to positive news flow, we are concerned about valuations, especially for PSUs within the power, steel, and energy sectors.

What will be the market impact if the election results do not meet market expectations?

Any potential change in the incumbent government during the upcoming general elections in May may be seen as a lack of policy continuity and is a key risk.

In a similar instance in 2004, this led to a 16 per cent Nifty correction within a month of the election outcome, although markets were much more expensive then versus now.

However, looking past the short-term move, Nifty generally delivers positive returns over 12 months, despite election outcome-linked near-term corrections.

2024 is a year of elections globally, including in the US. How will it impact the markets?

About 36 nations, representing 63 per cent of global GDP, are headed for elections in 2024.

Historically, going into an election year, the markets tend to do well as governments try to increase spending and emphasise growth.

S&P delivered 11 per cent returns in the US presidential election years.

Nifty tracks a strong 96 per cent correlation to S&P over the long term. This bodes well for our markets.

How will this year pan out for global markets, considering rate cuts are not happening the way markets have priced in?

The broad-based consensus is that equity markets will be fine unless the Fed restarts rate hikes (no landing + inflation higher) or macroeconomic (macro) momentum deteriorates quickly (hard landing).

The impact of monetary tightening has been a lot lower than in previous cycles.

In addition, the US government is running the most expansionary fiscal policy in a non-war period.

All these factors, along with the advent of artificial intelligence, have resulted in extremely resilient equity markets.

We could see higher volatility as markets navigate key global macro factors.

Still, if global (especially US) growth continues to remain resilient, the markets are unlikely to see any meaningful correction even if the rate cuts are delayed.

Do you expect foreign portfolio investor (FPI) flows to shift to cheaper emerging market peers?

India is one of the fastest-growing economies within EMs and is expected to lead GDP growth for CY24 and CY25 within Group of Twenty economies.

It is on a strong macro footing. Besides, the current growth outlook for India is more structural and reform-driven and is likely to sustain itself.

Given that both FPI ownership of Indian stocks and EM funds' India positioning are at multi-year lows, we don't see any material risk of reallocation of funds away from India into other EMs.

Moreover, global institutional investors continue selling Chinese assets and shifting allocations to EM benchmarks excluding China. That shift will continue to favour Indian equities.

Feature Presentation: Rajesh Alva/

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Sundar Sethuraman
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