Elections in India: What is the most favorable outcome for the markets?

The elections in India arouse the interest of financial markets. Between April 19 and June 1, 2024, around 960 million Indian citizens (out of a population of 1.4 billion people) are participating in the general elections.

With an electoral calendar distributed in seven phases, the results will be announced on June 4. The elections in India will be the largest in history worldwide, extending over 44 days in total. Narendra Modi, the current prime minister, seeks to achieve his third consecutive term.

Elections in India: A Modi victory would be a good omen for the markets

Amol Gogate, manager of the Carmignac Portfolio Emerging Discovery

Indian elections are notoriously complex and difficult to predict, but after a decade of solid growth, the consensus suggests that Narendra Modi will secure a third term. If Modi achieves re-election, it will likely mark a turning point in India's growth history.

Modi is a businessman and, under his leadership, India has become a major economic power, surpassing China as the country with the highest GDP growth. Modi's orthodoxy in managing the economy, with the application of a monetary policy framework based on inflation targets, supported by the Reserve Bank of India, has also successfully helped curb inflation. He has taken steps to clean up the banking sector and is also credited with implementing social and welfare reforms that have contributed to the country's social development.

In the context of an already rising Indian stock market (with a 60% increase in the last three years), it is understandable to speculate that the market is overvalued. But Modi's victory lays the groundwork for an acceleration of the economy and, for those with a long-term view, we believe that India remains extremely attractive and several tailwinds are on the horizon.

Internationalization of the market

In recent years, investment in the Indian stock and bond market has been overwhelmingly domestic. Two events could change this situation:

• Firstly, the inclusion of India in the JP Morgan emerging markets public debt index (GBI-EM), widely followed, starting from June 2024.
• Secondly, the inclusion of eligible Indian bonds in the Bloomberg emerging markets local currency index (BECLTRUU INDEX), starting from September 2024.

According to our estimates, these two events could bring up to 40 billion dollars of foreign investment. This represents a huge opening of the market. And the "halo effect" of this internationalization should transfer to the equity markets as foreign institutions become familiar with the country. This, combined with the relative sustainability of high levels of domestic investment and the confidence of savers, suggests that capital should continue to flow into India.

Structural changes benefit the boom of small and medium capitalization companies

India is a high-growth market, with a deep culture of equity investment and a liberal democracy. All of this encourages entrepreneurship and fuels a thriving capital market. This has been driven by a changing business policy that offers a more favorable ecosystem to start-ups. Its financial system is a great example of how close collaboration between the government, regulators, and companies has created a highly sophisticated and well-managed system. This approach has reduced frictions and benefits multiple parties. In recent years there have been several highly successful IPOs and it is likely that, after more than a decade, a bullish investment cycle will finally occur. In our opinion, of all the markets in the world, it is the one most likely to repeat the success of the United States.

With rapid expansion, investors can identify attractive and disruptive companies in many sectors, such as financial services, high-end manufacturing, specific consumer segments, and the real estate sector. With valuations already quite high, understanding the complexities of the business landscape and individual companies will become increasingly important.

Regardless of the election results, India's trajectory is undoubtedly positive, with many attractive investment opportunities for the discerning investor. In our opinion, a Modi victory should significantly accelerate this process.

Mo Elmi, main manager of the emerging markets fixed income portfolio at Federated Hermes:

The good results of the ruling Bharatiya Janata Party (BJP) in last year's state elections bode well for Prime Minister Narendra Modi's efforts to be re-elected for a third term.

Although Modi has been accused of interfering with the independence of the judiciary, undermining parliamentary oversight, and discriminating against religious minorities, he has been praised for leading India's rise as a world power.

We believe that a Modi victory will lead to a continuation of India's robust economic growth path of recent years.

Michael Langham, emerging markets analyst at abrdn:

We expect Prime Minister Modi to achieve a third term, in line with the widespread opinion, given Modi's popularity among voters and the lack of dynamism of the main opposition, the Congress party.

It is unlikely that Modi will deviate much from his previous policy in a third term, given the optimism surrounding India's economic prospects and his popularity among voters. Although the specific details of possible reforms have not yet been announced, the president has expressed his intention to carry out an aggressive initial 100-day reform program in his third term. The BJP manifesto is largely based on agriculture and manufacturing industry, so these areas are likely to be prioritized.

Ultimately, job creation remains at the core of Modi's economic strategy, with the rapid growth of the working-age population and the challenges posed by job creation in the productive sectors of the economy. Global geopolitical tensions and the resulting changes in supply chains are creating opportunities for India, which has already reaped some benefits from investment.

Improving infrastructure and leveraging the successes of the digital economy seem to be fundamental pillars of Modi's economic model for the future, with some initial successes evident in his second term. However, it remains to be seen India's ability to attract investments towards the manufacturing sector in a way that can truly transform the economy to reach a path of higher potential growth. The protectionist trends of the "Made in India" initiative highlight the frictions surrounding the shift towards a more export-oriented economic model.

The pandemic significantly disrupted Modi's plans for his second term, but there is much optimism around the third, given India's good economic performance. In a way, this means that the bar for disappointment is quite low, but if Modi can take steps to unlock greater productivity and labor participation, India could surprise even the current market expectations.