Lok Sabha polls & stock market: Is the voter turnout dip worrying D-Street?

Foreign investors wait on the sidelines, seeking clarity on the next government's composition and strength

The low voter turnout in the ongoing Lok Sabha (LS) polls compared to the LS polls in 2019 seems to be worrying Dalal Street, observed analysts, who remain cautious. India voted in the fourth phase to elect representatives to the 18th LS on Monday.

A total of 96 LS seats went to polls on Monday across 10 states and Union Territories, including Bihar, Jharkhand, Jammu & Kashmir, West Bengal, and Madhya Pradesh.

Meanwhile, the markets saw the S&P BSE Sensex and the National Stock Exchange Nifty 50 slip nearly 1 per cent each, with the India Vix — the volatility/fear gauge — spiking over 14 per cent in intraday deals.

 

Interestingly, during the earlier three phases of elections, the market witnessed similar volatility, with the Nifty 50 taking a substantial hit. Market experts attributed the spike in volatility (India Vix) to lower voter turnout for the polls, raising speculation on the victory margin of the ruling government, perceived to be over 400 seats.

From a short-term standpoint, Chokkalingam G, founder and head of research at Equinomics Research, said the Sensex and Nifty stocks are relatively better positioned in terms of valuations than their small and midcap peers.

“Investors are keeping an eye on the turnout in the ongoing polls and remain cautious amid the low numbers compared to 2019. That said, they will give more preference to the government’s stability and the reform process that the next government undertakes. While the Sensex trades at a trailing price-to-earnings of 23.25x, the smallcap index trades at 32.2x, and the midcap index trades at 30.8x,” he said.

The first phase of LS polls took place on April 19. The Nifty plunged 1 per cent in intraday deals but eventually ended 0.7 per cent higher. The voter turnout, according to the Election Commission of India, stood at 66.14 per cent, a drop of 4 percentage point from 2019.

Against this backdrop, investors, suggests Gaurang Shah, senior vice-president at Geojit Financial Services, should brace for volatility and sharper intraday swings as the election process keeps the newsflow thick and fast-paced.

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“For the markets to stabilise, the India Vix needs to cool off. Investors need to brace for volatility in the short term. The downside appears limited from the current levels. It is advisable to stay away from the markets for now and buy only on a dip. Banking, financial services and insurance, cement, defence, power, automotive, non-banking financial company, and fast-moving consumer goods are some of the sectors I am bullish on,” he said.

Foreign money exit

Foreign investors, too, have preferred to stay on the sidelines until there is clarity on who will form the next government — and with how much muscle.

Another key factor driving the foreign institutional investors/foreign portfolio investors (FPIs) out of the Indian stock market, according to V K Vijayakumar, chief investment strategist at Geojit Financial Services, is the relative attractiveness of other equity markets across the globe, especially China.

The recent FPI selling in the Indian stock market, he said, is also due to a change in FPI stance from ‘Sell China, Buy India’ earlier to ‘Sell India, Buy China’ now. This change in stance, he said, has been caused by the recent outperformance of China (Shanghai Composite up by 3.96 per cent and Hang Seng up by 10.93 per cent in the past month) and underperformance of India (Nifty down by 2.06 per cent in the past month).

“This is likely to be a near-term trend triggered by the cheap valuations of Chinese stocks and the relatively high valuations of India. It is important to understand that India’s long-term prospects are much better than China’s,” he said.

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In this backdrop, investors, suggests Gaurang Shah, senior vice-president at Geojit Financial Services should brace for volatility and sharper intra-day swings as the election process keeps the news-flow thick and fast-paced.

"For the markets to stabilise, India VIX needs to cool-off. Investors need to brace for volatility in the short-term. That said, the downside appears limited from the current levels. It is advisable to stay away from the markets for now and buy only on a dip. BFSI, cement, defence, power, auto, NBFC and FMCG are some of the sectors I am bullish on," he said.

Foreign money exit

Foreign investors, too, have preferred to stay on the sidelines till there is clarity on who will form the next government and with how much muscle. 

Another key factor driving the FIIs/FPIs out of Indian stock market, according to V K Vijayakumar, chief investment strategist at Geojit Financial Services is relative attractiveness of other equity markets across the globe, especially China.

The recent FPI selling in the Indian stock market, he said, is also due to a change in FPI stance from ‘sell China, buy India’ earlier to ‘sell India and buy China’ now. This change in stance, he said, has been caused by the recent outperformance of China (Shanghai Composite up by 3.96 per cent and Hang Seng up by 10.93 per cent last one month) and underperformance of India (Nifty down by 2.06 per cent last one month). 

“This is likely to be a near-term trend triggered by the cheap valuations of Chinese stocks and the relative high valuations of India. It is important to understand that India’s long-term prospects are much better than China’s,” he said.