Market Awaits Policy Recalibration Post-Election Verdict: Kotak AMC’s Nilesh Shah

“With election results falling short of market expectations and exit polls, a correction is happening. Investors will be watching what kind of government is formed, how political parties analyze this verdict, and what policy changes occur,” says Nilesh Shah, MD, Kotak AMC.

Changing Market Conditions

The market at 22,000 today is not the same as it was a few days ago. The market responds to events, and when actual outcomes differ from expectations, there’s a reaction. The market was expecting a stable government and policy support for accelerated growth. With the exit polls showing strong results, the market rallied on Monday. But the actual election results were lower than expected, leading to a market correction. Investors are now focused on what kind of government will form, how parties interpret the results, and what policy changes will be made.

Policy Recalibration

One likely policy change is increased support for consumption, especially for lower-income groups and mass-market products. With this shift, the market will adjust and find a new level.

Despite the political setback, there are positives for the market. Our growth momentum is strong. In FY24, the Nifty 50 EPS was 3% higher at the end of the year than at the beginning, which is rare. Usually, earnings estimates are revised down as the year progresses. Our profit-to-GDP ratio is above average, and corporate India’s debt-to-GDP ratio is below average, keeping valuations reasonable. Additionally, OPEC’s production cut has brought oil prices down to $77, with expectations of staying below $80. These fundamentals are strong, but the market will wait for political stability before making any major moves.

A Cricket Analogy

Think of this like India’s World Cup campaign. We played well until the semi-finals, but underperformed in the final. Similarly, the market had high expectations until the exit polls, but the actual results were disappointing. However, this also showcases the maturity of our democracy. Despite all the election noise, India has shown the world it has a vibrant democracy. This could boost confidence among global investors.

Future Policy and Portfolio Strategy

With the election results in, there will be a recalibration of policies. Political parties must consider voters’ wishes, and sometimes good politics and good economics don’t align. Our 8.2% GDP growth in FY24 was driven by public investment and trade, with less contribution from consumption and private investment. Consumption in rural India and for mass-market products was lower than overall GDP growth, while urban and premium product consumption was higher. There will likely be a focus on boosting consumption, especially at the lower end of the income spectrum. The market will wait for these policy changes before deciding on portfolio strategies.