India’s election begins next week - how will it impact markets?

Nearly one billion people will begin the world’s largest democratic process next week, as India goes to the polls.  

With results announced in early June and voting starting on 19 April, investors will be closely watching how this may impact the country’s stock market, which has been a star performer recently. 

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Data from the Association of Investment Companies (AIC) shows that the average investment trust in the India/India Subcontinent sector has produced a return of 28% over one year, and 42% and 170% over five and 10 years – outstripping the average Global Emerging Markets trust which has generated returns of 8%, 14% and 73% over those periods. 

Popular trusts in the space are India Capital Growth, Ashoka India Equity Trust and abrdn New India Investment Trust.  

Open-ended funds have also performed well, with Jupiter India a favourite among ii customers.  

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What will happen in the election?  

The current prime minister of India, Narendra Modi (pictured below) of the Bharatiya Janata Party (BJP), has been in office since 26 May 2014. If re-elected for a third term, Modi has pledged to make India the third-largest economy by 2027. India is not only currently the fifth-largest economy in the world, it’s also one of the fastest-growing, with the World Bank projecting GDP growth of 7.5% this year. 

The Modi-led BJP is expected to win again, comfortably, according to fund managers. Gaurav Narain, manager of India Capital Growth fund says the main question is how strong Modi's mandate will be. 

He says: “In the previous election in 2019, the BJP won 303 of 543 seats. Their target in this election is 370 seats. The closer they get to 370, the more positively it would be viewed.” 

Ayush Abhijeet, investment director of White Oak Capital Partners which advises Ashoka India Equity Trust, also says the consensus expectation is for the continuation of the current regime with a strong majority further bolstered by recent state election results.

What will happen to Indian shares?  

Narain says that as the expectation of a BJP victory is already factored in, there will likely be “no material impact on the markets” from the election on his investment trust. 

However, if the BJP fares poorly, or does not get a majority, it would be negative for the markets and the fund, he says.  

Abhijeet also says that markets believe Modi will be re-elected, but any contrary outcome, such as a weak coalition at the centre, would be a negative surprise.

The election is therefore a low-risk event for markets. James Thom, co-manager of abrdn New India Investment Trust, adds: “Modi’s return is viewed by the market as a positive because it implies policy continuity in India, including his extensive reforms agenda, and demonstrates political stability.  

“This should provide a supportive backdrop for sustained economic growth and for the government to pursue its ambition of turning India into a global manufacturing hub.” 

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Why invest in India?  

With Indian shares rising so much over the past decade, have investors missed the boat, or is there more growth to come?  

JPMorgan Indian Investment Trust manager Amit Mehta says that demographics are compelling in India, with India recently overtaking China as the most populous country in the world, with an age distribution weighted towards working-age groups. 

He says: “This demographic shift, and the associated rise in incomes, should continue to fuel the growth in India’s middle class. Consequently, we are seeing a number of exciting opportunities in the consumer space, such as leading auto manufacturer Mahindra & Mahindra with a continually growing business in tractors, farm equipment and SUVs. This company stands to benefit significantly from increased consumer demand and consumption spending.” 

The country is experiencing rapid digitalisation of services, supported by increasing internet penetration, which is another reason to be optimistic, says Abhijeet. 

He adds that the government is undertaking steps to bring manufacturing to India and upgrade the country’s infrastructure, and it is supported by a banking system at its healthiest in more than a decade.  

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However, there are risks. Mehta highlights three: inflation, potential political surprises, and a possible downturn in the US economy. 

On inflation, as a large net consumer of commodities, and an energy importer, the Indian economy is vulnerable to rising commodity prices, particularly oil and gas prices.  

“Rising import prices could widen the current account deficit, weaken the rupee and compound price pressure,” Mehta says. 

While investors think that the coming election will be favourable to investors, there is always the potential of a short-term jolt to markets. Meanwhile, India is closely connected to the global economy, and a US recession could lead to an economic or stock market downturn in India as well, Mehta notes.