Election Results: A Powder Keg for India's $5 Trillion Stock Market?
In less than a week from now, election results will determine who governs India. Historically, this period makes markets jittery; but this time, there's an unusual calm, even after a long and ferocious bull market. Traders largely believe the National Democratic Alliance (NDA) is poised for a third term; but market veterans may not be so sanguine. They are the ones who have witnessed, first hand, trading halts after market crashes in 2004 and euphoric rallies in 2009. Both times, market sentiment was wrong about the actual results, challenging the wisdom of Phalodi, the Rajasthan town famous for betting which influences traders significantly.
This column isn't about predicting the election outcome but rather questioning whether political parties, fresh out of an unusually nasty election, understand that today's stock market with a US$5trn (trillion) market capitalisation is a powder keg that can be ignited by an ill-considered statement. History shows that this possibility isn't far-fetched.
Public memory is short and even Google offers only sketchy details of events going back 10-15 years. Yet, knowledge of past market behaviour is crucial today because millions of investors, who have joined the market in the past few years, have never experienced a serious correction or bear market. Most have been investing for just over three years and believe stock prices only move upwards.
Market Structure
For starters, let’s look at who invests in the market today. Until 2009-10, India’s investor population stagnated and actually dipped from 20mn (million) (including mutual fund investors) to anywhere between 8mn and11mn. Moneylife has covered this extensively. Post-March 2020, as COVID confined people to homes, many discovered the capital market as a quick money-making source, facilitated by easy trading through online broker registrations and retail algorithms. In fact, markets around the world went up on government stimulus to deal with the economic impact of the COVID lock-down. It led to a surge in investor registrations on the National Stock Exchange (NSE), reaching over 90mn unique investors by February 2024. Of these, the last 10mn registered in just five months.
What does this signify? Assuming India has 100mn investors today, at least eight out of 10 investors have an investment life of just three years; most are young and in the age group of 20-30. They have only seen a market where the bellwether Nifty50 rose from under 9,000 to over 22,888, and are full of sunny optimism that the NDA will return to power and the bull run will continue. This is about direct investors.
Indirect investors also flocked to mutual funds (MFs) seeking returns that beat inflation, contributing over Rs20,000 crore per month (now) through systematic investment plans (SIPs) from 87mn investor accounts. At least half of these have begun investing in the past three years. MFs, with their aggressive ‘mutual funds sahi hai’ campaign have garnered over Rs57 lakh crore of assets under management (AUMs) by April 2024.
Indian MFs are the biggest force in the market today. So, when foreign portfolio investors (FPIs) sold a whopping Rs119,272 crore of stocks since January this year, Indian MFs pumped in over Rs197,571 crore keeping the bull run intact. But if investors suddenly pull out their money, MFs, will have no choice but to sell shares to meet redemption pressure, hurting long-term investors who choose to hold on.
While it is all very well to read the legendary investor Warren Buffett saying, “Our favourite holding period is forever,” the reality is that investors rush for the exit during a panic as their paper profits begin to vanish. When this happens, logic about long-term value and excellent company performance across sectors is ignored. Blue-chip stocks may be less impacted but aren't immune to a beating.
We haven't even discussed the speculative froth in small-cap stocks whose prices have shot up 300%-1000%, depending on the sector. Such stocks have historically declined 80- 90% after a crash.
Another big component of the market today is the massive volume generated by derivatives trades. The volume of speculation through equity derivatives has touched US$6trn and the finance ministry is reportedly concerned at unchecked retail participation in such rampant speculation. In fact, the Futures Industry Association (FIA) has said that India accounted for 84% of all equity options contracts traded globally last year.
According to a study released by the Securities and Exchange Board of India (SEBI) last year, 90% of active traders in derivatives lose money. SEBI has forced all stockbrokers to put this up as a notice that pops up on their screens each time investors log into their trading portal. But investors remained unfazed and continue to speculate.
On the flip side, The Economic Times reported in April that Jane Street, a quantitative trading firm, earned over US$1bn (billion) in 2023 alone, through a ‘highly profitable’ trading strategy algo. Jane Street has sued Millennium Management Global Investment and its two former employees for stealing this strategy and deploying it in India. Clearly, they are both profiting at the cost of Indian speculators who may vanish if there is a sudden crash.
Nobody really knows what will happen on 4th June. It could be an anti-climax like the Y2K panic at the turn of the century. On the positive side, we could have reaction like18 May 2009, when the market was euphoric at the United Progressive Alliance (UPA) bagging a second term. The Sensex had then shot up 17% in a single day and trading had to be halted due to the upward surge.
And yet, five years earlier, there was a blood bath on 17 May  2004 when the same UPA was set to form a coalition government. The Bharatiya Janata Party’s shock defeat after the ‘India Shining’ campaign, followed by ill-considered statements of Communist Party leaders (who allied with the Congress in that election) led to such a panic that stock prices crashed 10% within the first 20 minutes of trading, forcing a circuit break, and another 5% when it reopened after an hour. The NIFTY plunged 17.47% that day causing hundreds of panicky small investors taking to the streets shouting slogans against the regulator and Sonia Gandhi. There were desperate attempts to pacify investors, but it took at least six months before the indices regained earlier levels.
An investigation revealed that the panic was triggered by huge sales pressed by Union Bank of Switzerland (UBS) on behalf of 12 entities who were beneficial owners. This, too, is important, because the Indian market continues to be vulnerable to concerted selling through FPIs, where the ultimate economic beneficiary is not known. Remember, how the details of those behind the steep rise in Adani group shares as well as their fall (after the Hindenburg Research report) are still not known? All we have is rumours that SEBI has sent out notices to some short-sellers.
At a time like this, after an ugly divisive poll campaign, we desperately need all political parties to respond to the election results with maturity and sobriety. Every party must realise that anything they say and do will have serious implications for the country and its people – not merely those who invest in the market.
2 months ago
Election results is only one of the Geo Political risk. There are several others in store in 2024 and in the following 5 years. Perhaps, if India gets a stable Government which performs all desirable fronts, the markets ultimately may rise over time, even there are falls in between. Hang on if believe in the India story.
2 months ago
Maturity (and beauty) are all in the eyes of the beholder. What's the yardstick?

The stock market is simply a collection of participants with varying idiosyncrasies. This includes political parties who may or may not care about stock markets or, indeed, the well-being of everyone involved. All's fair in love and war. That's how the game is played.

The stock market is an information system, and investors need to factor in the "stupidity" and "immaturity" of the political parties into the equation (and what might happen on 4th of June and beyond). It will include rumours. The whole point of markets is to be a signalling mechanism for everyone involved, including political parties.

It all boils down to how well you assess crowd behaviour and psychology, and you have to decide for yourself what to do with the information. Go long or short? Hedge? Diversify? Redeem? Cash out? Everyone has a choice before June 4th. Stock markets come with terms & conditions. Otherwise, people are well advised to cash out and sock their money under a pillow.

That's the beauty of markets.

PS: Politics is always ugly and divisive. It's called democracy. Otherwise, people can settle in Singapore or Saudi Arabia or Venezuela. Or China. I will read more HL Mencken.

PSS: I agree that maturity is much needed overall, but that's not how politics works, whether here or House of Lords or US of A. Idealism is a fantasy.
Replied to adityag comment 2 months ago
Politics is not always divisive. There are several almost-consensus topics such as education and health, but a divisive government amplifies the divisive topics and suppresses the consensus topics.
Replied to amit_kumar comment 2 months ago
You mean the media distorts and makes things divisive? Most likely.

As far as I know, this government has been for development from Day 1, although there have been so called "missteps" and certain "misallocation" of resources. And perhaps, their execution has not met many "pundits" expectations.

This is very much like software development, where iteration is more important than execution everything perfectly. You write the code, you debug it, you make changes, you write the code again, rinse and repeat. Sure, if you are bugged by this process, then I can't help it. That's life. I was told that democracy works in similar fashion -- can't please everyone.

If you have any solutions on how consensus can be reached, then please have a strong opposition, yes? And politicians, particularly the opposition, need to debate like grownups instead of throwing tantrums and adjourning the house every single time, yes? This is my biggest worry.
Replied to adityag comment 1 month ago
Mainstream media was just an arm of the govt in the last 10 years. This means it is the govt which 'makes things divisive'.
Meenal Mamdani
2 months ago
Thank you for this timely article on the market.
My cousin advises investment in the market and he tells me that not just youngsters but even more mature investors sell when the market goes down, even when they don't need the money.
Indian investors are loss averse even more than risk averse.
2 months ago
A well intentioned caution to all stakeholders
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