How Election Results on June 4 Could Impact Stock Market Performance: Key Insights for Investors

• The Indian stock market entered the Lok Sabha election 2024 season with the expectation that the incumbent government will continue to remain in power, and hence, the market has already factored in policy continuity.
• Various opinion polls have projected seat wins in the range of 315 – 329 for NDA, while none of them have indicated a return of the INDI Alliance, with average seat wins in the range of 93 – 156 seats.
• Analysts believe that the improvement in macro variables and the government’s focused approach on infrastructure development, while being fiscally prudent, has gained investors’ interest in recent years.

As the Indian stock market braces for the 2024 Lok Sabha elections, investors are keenly watching for policy continuity and potential market volatility.

How did the markets perform in the last five general elections?

JM Financial’s assessment of market returns during the last five general elections reveals that overall stock market returns turn positive in three months post results while on a sectoral basis positive returns are seen largely across sectors six months post results.

Sectoral Performance and SMIDs

SMIDs (Small and Midcaps) outperformed large caps post results in every timeframe in past cycles. We are cognizant that the above approach will even out individual sector performance and may, hence, not repeat going forward. As market performance was impacted by concerns around global slowdown during August 2019, analyzing returns post 2019 elections will not give a true picture; hence, we look for periods where market conditions were similar, i.e., 2014 general elections when equities were already performing in the run-up to elections, said the brokerage.

What should one expect after Lok Sabha election results?

JM Financial expects the Indian stock market to witness healthy gains after the election results and believes any dips should be bought into.

Policy Continuity and Sectoral Preferences

“Policy continuity will ensure that the government’s main focus will remain on infrastructure development and manufacturing, which will benefit sectors in Defence and Capital goods space. However, unlike in past periods, in this cycle we prefer Large caps over SMIDs in 2024 as we look for valuation comfort,” it said.

On a sectoral level, the broking house finds valuation comfort in Private Banks and Consumption space, which are expected to outperform the benchmark in the near term.

Conclusion

Currently, Nifty is trading at 20x forward PE, closer to one standard deviation from long-term mean, which it considers reasonable. After the election results, the markets will shift their focus on to the Union Budget, which is likely to be tabled in July.