Market volatility is at its peak despite brokers’ confidence in the Modi government’s victory

Despite increased volatility in the stock market amid concerns over the outcome of the June 4 general elections, most brokerages still expect the National Democratic Alliance (NDA) led by Prime Minister Narendra Modi to easily form the central government for the third consecutive time.

“Amid concerns about policy continuity, we expect the BJP to easily retain its majority in the ongoing Lok Sabha general elections…Based on our assessment of major states based on Pan India data, we see an incremental net loss of 4 seats to 299 for the BJP in our base case , while our bear-bull scenario is within a narrow range of 290 to 310,” JM Financials analysts said on Tuesday.

The India VIX Volatility Index rose over 5% intraday on Tuesday to hit a two-year high of 24.48. The index, which measures market expectations for volatility over the next 30 days, has been rising since the 2024 Lok Sabha elections began last month.

It rose to 124% within a month, as lower voter turnout in the six phases completed so far raises questions about whether the ruling party will gain the large advantage necessary for continued market-friendly policies.

“As the market approaches the election result, volatility due to uncertainty is likely to persist. However, earnings growth for the March quarter earnings so far has been well above expectations, which may support the valuation, currently moderately above the long-term average,” said Vinod Nair, head of research, Geojit Financial Services.

Emkay Investment Managers (EIM) on Tuesday said the expected return of the NDA regime in a base case scenario of 330 seats will ensure policy continuity and enhance the positive sentiment in Indian markets.

With an expected earnings growth of 15%, the brokerage expects Nifty to touch 24,500 by December 2024. Nifty is expected to further increase upward mobility to cross 26,500 by December 2025, EIM added.

Manish Sonthalia, chief investment officer at EIM, said, “BFSI, PSUs and industrials are expected to perform well. BFSI led earnings growth and saw valuation correction. Investment topics will come into play as energy capital expenditures increase over the next 3 to 5 years.

The benchmark Sensex ended Tuesday’s session at 75,171, down 220 points, while the Nifty50 index ended the session at 22,888, down 44 points. Apart from the elections, Indian markets are choppy due to continuous selling by foreign portfolio investors (FPIs).

Most brokerages also believe that a victory for the opposition INDIA Alliance could lead to a sharp correction as the focus on populist politics will not be able to justify the high valuation of local stocks.

Global brokerage UBS on Monday highlighted four scenarios for the election outcome and said an alliance with India coming to power would be a big negative for stocks. She added that in this scenario, stock valuations may decline and a test of pre-NDA valuation multiples is likely.

While UBS said the probability of the BJP winning over 272 seats is high, the ruling party’s actual progress in the first five phases of elections is less clear.

Lower voter participation so far and possible loss of some vote share in key states such as Maharashtra, Karnataka, West Bengal and Bihar due to regional political uncertainty raise questions about the NDA’s ability to secure a third term, UBS said.