The much-awaited Indian election results are out, and if Modi and the BJP can persuade the allies to stay with them, the NDA government will remain in power.
But why did the market react the way it did on Monday? The NDA will form the government that never went out of the equation. So, what was the problem? The problem is BJP falling short of the 272 mark alone. The NDA is likely to come to power but with less power. Let us look at what it means and what investors should do amid this volatility.
The Issue
As mentioned above, NDA is well-poised to return to power. However, as predicted earlier (including exit polls), they did not hit the supermajority mark of 370 plus seats in the 543-seat lower house of parliament.
On the flip side, the BJP alone did not hit the halfway mark of 272, which it had comfortably crossed in the 2019 election. The current situation hands kingmaking power to his allies. With the current seat numbers, the uncertainty is what if the opposition led by the Indian National Congress attempts to lure them (allies) away.
Problem with Coalition Government
Here are some drawbacks of a coalition government that you should understand. It will help you understand why the market reacted the way it did:
Policy Inconsistency: Coalitions require parties with different ideologies to find common ground. It can lead to watered-down policies that lack a clear direction or frequent compromises that displease everyone. The market fears that if INDIA comes to power, there won’t be strong policies that would impact India’s growth story.
Instability: Maintaining a coalition requires constant negotiation and concessions. Disagreements within the coalition can lead to infighting, votes of no confidence, and even collapse of the government, triggering new elections. Investors even like unstable governments.
Weakened Mandate: Voters might feel a coalition government doesn’t truly reflect the people’s will, as it wasn’t a single party’s vision they elected. It can lead to a sense of detachment and lower public trust.
Focus on Short-Term: Coalitions, worried about maintaining their alliance, might prioritize short-term wins and crowd-pleasing policies over long-term strategic planning. If that happens, India’s vision of becoming a developed nation by 2047 may take a backseat.
The Market Reaction
After easing on Monday, the volatility index jumped to its highest since March 2022 at 29.79. The short answer to the fall is that the exit polls were at an extreme (favoring NDA and a clear win for them). Anything that did not point to more strength was a negative for the market.
On Tuesday, the market opened with a gap down, and the fall widened as the market closed. All the sectors bleed red. Here is a look at how different sectors performed:
- Bank stocks fell 7.8%
- Realty dropped 9.1%
- Infrastructure declined 10.5%
- Oil and gas stocks lost 11.7%
- State-run companies fell 17%
- PSUs bleed 16%
The biggest fall came in the Adani Stocks. Among Nifty50 companies, Adani Enterprises and Adani Ports were top losers, falling nearly 19% each. Other Adani stocks were down between 9-19%.
What should investors do?
Markets were at an all-time high, and there was a lot of built-up for the upward rally. However, all that has gone.
For now, even the best stock market advisors in India do not know how much more the market will fall. The market should stabilize soon if the NDA can form the government without much drama. But if the drama happens, investors should tighten their belts for a more volatile ride.
How should investors deal with the present situation? The answer is simple – do the basics. Here is what you should continue to do:
- Maintain a Long-Term View: Markets are cyclical, with periods of ups and downs. Focus on long-term goals and avoid emotional decisions based on short-term fluctuations.
- Stay Diversified: Don’t put all your eggs in one basket. Spread your investments across different asset classes. Within equity, ensure your portfolio is not concentrated on a specific sector or industry.
- Rebalance if Needed: Revisit your asset allocation and rebalance your portfolio if it strays from your target percentages due to market movements.
- Resist the Urge to Sell: Selling in a panic can lock in losses. Consider an investment’s long-term prospects before making any drastic decisions.
Before you go
Human emotions will make it super tough for investors to ride the volatility. Volatility can trigger emotional responses in investors, leading to rash decisions. AI tools can help remove emotions from the equation by providing data-driven recommendations based on your investment strategy. It is a perfect time to start using AI for trading / investing. AI can process massive amounts of data much faster and more comprehensively than humans. It includes historical market data, company financials, news sentiment, and social media trends. By analyzing these vast datasets, AI tools can identify patterns and potential opportunities that might be missed by traditional analysis.