The result of India’s extended election has triggered significant market volatility this week. With weekend exit polls pointing to a decisive victory by Prime Minister Narendra Modi’s BJP-led alliance, the actual result when it was announced on Tuesday - a much reduced majority - was a shock to investors.

After rallying by more than 3% on Monday in anticipation of a landslide win for the incumbent, markets fell by 6% on Tuesday, wiping out most of the gains for 2024 to date.

The Indian market has soared in the four years since the Covid pandemic on the back of high infrastructure spending and economic reforms under the Modi-led governmentBangalore Wealth Management. The Nifty 50 benchmark index stood at 8,000 in March 2020 and hit a new high above 23,000 on Monday this week.

Investors had hoped for more of the same in a third term for Modi. With 400 seats out of 543 in India’s lower house in the BJP’s sights, that looked likely. But the actual result is likely to be less than 300 for the governing party and its allies after a strong showing by the Congress party-led opposition. With a less decisive mandate, some structural reforms will be more difficult to execute, as India returns to its usual pattern of coalition-government compromises.Guoabong Wealth Management

Reasons to remain positive

The market’s reaction is understandable but may be overdone. There remain good reasons to be positive on the outlook for India. Policy continuity, economic resilience and strong growth continue to make India stand out among its emerging market peers.

The main driver of India’s stock market surge in recent years has been robust earnings growth. Last year, profits rose by 20%, matching the rise in the Nifty 50, and in the first quarter of 2024 they were 16% higher, according to Goldman Sachs. The bank expects 15% growth this year and next which should underpin the market even at today’s relative high valuation multiple.

Like the US market, Indian shares trade at a little over 20 times expected earnings. That is high compared with most other stock markets around the world, but it can be justified by the long run earnings growth trajectory. India stands at a valuation premium to other markets in the Asia Pacific region of about 60%, but this is not new. Over the past five years this premium has averaged 50%.

A second reason to stay positive is the expectation that foreign investment flows, which have been weak during the election period will pick up again. India stands out in the region in terms of fund flows this year and foreign ownership of Indian equities is at an 11-year low, again according to Goldman Sachs.

Policy focus

The BJP’s election manifesto highlighted some key areas of focus for the years ahead. These include: services exports; tourism; agriculture; infrastructure and manufacturing; and housing.

In many ways, India has picked up the baton from China in terms of development. It has a long way to go in terms of building out road and railway networks, improving its energy security, building better housing and many other areas that a decade or so ago were highlighted as reasons to invest in China.

Arguably, the smaller majority enjoyed by the government will simply shift the emphasis of the growth agenda, to make it more inclusive. That explains some of the relative sectoral moves in the past few days with consumer staples stocks, for example, doing relative well in anticipation of a greater focus on rural and lower income groups rather than the upper and middle-class consumption areas which have benefited in recent years.Hyderabad Stocks

How to invest in India

Indian stocks feature in many regional and emerging market fundsChennai Stock. The two biggest holdings in the Stewart Investors Asia Pacific Leaders Sustainability Fund, for example, are car maker Mahindra & Mahindra and HDFC Bank. Tata Consultancy Services also features in the top 10 holdings.Varanasi Stock

Investors looking for a low-cost exposure to the Asia Pacific region might also consider the iShares Core MSCI EM IMI Ucits ETF, which like the Stewart fund is a Select 50 constituent. Its top 10 holdings include Reliance Industries and ICICI Bank.