With weeks to go before India starts voting in a general election that the incumbent government is widely expected to win, Indian equity markets are uncharacteristically languid and not seeing the traditional pre-election rally, according to Reuters.
Analysts say this time is different, pointing to a stellar rally in the past year, rich valuations and uncertainties around political issues such as corruption and electoral funding as factors giving investors reason to pause.
The Nifty index has climbed over 30 per cent over the past year, the second biggest gain among Asian indexes, but has faltered this month.
Abhisekh Goenka, founder and CEO of wealth management firm IFA Global, said stocks had been weighed down by profit-taking at the financial year end in March and political factors.
Parliamentary elections will be held in phases from April 19 to June 1. The consensus is for Prime Minister Narendra Modi's National Democratic Alliance (NDA) coalition government to win the elections.
But a string of recent developments including disclosures on political funding for Modi's party, and other tax and corruption charges against parties in the Congress-led opposition alliance have cast doubts over whether Modi's Bharatiya Janata Party (BJP) can get a resounding victory.
"The uncertainty will loom till election results are out, and as widely expected, if BJP sweeps the polls, we expect a further breakout rally in the equities," Goenka said.
Historically, Indian equities have started strong in election years, with the Nifty index averaging a 5.2 per cent return in the first quarter of the previous three election cycles. However, the index saw only a modest 2.7 per cent increase in the same period this year.
Foreign capital inflows have also dried up. In contrast to the $3.08 billion received from foreign investors in the first quarter of the past three election years on average, the inflow has dwindled to just $1.33 billion in the same period this year.
"Heading into elections, we could see some volatility amongst specific areas of the Indian market, such as small-cap stocks, which have rallied over 54 per cent over the past 12 months," Malcolm Dorson, senior portfolio manager and head of emerging markets strategy at Global X ETFs.
"Prices have moved ahead of earnings momentum, making some of these names more vulnerable to headline risk."
However, the Nifty Volatility index, commonly known as India's VIX, is trading around 12, its lowest in the run-up to the election compared to the last three cycles.
Not everyone is apprehensive. Investors betting on India's strong growth say its stock market is more appealing than that of other emerging markets.
© 2024 - All Rights with The Financial Express
