With the Indian Prime Minister Narendra Modi set to retain power after the general election – albeit with the Bharatiya Janata Party (BJP) losing its outright parliamentary majority for the first time in 10 years – investment managers discuss the impact.

Indian Prime Minister Narendra Modi (pictured) declared victory in the elections this week, sparking a rollercoaster 48 hours for Indian equity markets.

While Modi and the Bharatiya Janata Party (BJP) will remain in power, as expected, a slimmer majority could have implications for their programme of reform. India's stock market was hammered by the news that emerged on Tuesday. The The NSE Nifty 50 and BSE Sensex indices closed at 5.93 per cent and 5.74 per cent lower, respectively, after falling by as much as 8.5 percent earlier in the day. Markets recovered on Wednesday and today, but did not fully recover from the sell-off.

Indications are that this outcome has been caused by poorer and regional voters been who have been left out of India’s growth story, wth their experience being less positive. The likely impact of this is that Modi’s reform agenda could be scaled back. More immediate policies which focus on improving the lot of India’s rural population â€“ farming subsidies, food and increased consumption being potential candidates – could be brought forward.

The elections, involving 970 million voters and in a process lasting six weeks, appear to have gone off without the kind of arguments over the vote count that has become a staple of US politics in recent cycles. This is a busy year for polls, with more than 40 jurisdictions holding elections, including the UK on July 4 and the US on November 5. Recent elections have included those of Mexico, Taiwan, Finland, Pakistan, Indonesia, Russia, Portugal, South Korea and South Africa, among others.

Here are some reactions to the results from investment managers.

Nick Payne, investment manager, global emerging market equities, at Jupiter Asset Management
“Although longer-term reform will continue, we believe it will now necessarily have to progress at a slower pace. We think the scale and success of historic reforms and the ability to maintain the focus and direction for the future will continue to power India’s growth looking forwards. As if to evidence this; lost in Friday’s election noise was an upwards revision of India’s GDP number to +8.2 per cent – an impressive increase aided by successful implementation of reforms enacted in earlier terms.

“Although we expect to see continued short-term volatility as the market digests these changes – the rotation into stocks which have lagged the rally in Indian markets over the past 18 months could persist for the short term – longer-term we think the impact will be minimal. The past two terms of economic reform have set the nation up well to continue its current trajectory of growth. Continuity of the ruling party should also see continuity of the reform agenda and government capital expenditure, albeit with a pivot towards more immediate support for India’s rural population.”

Gaurav Narain, manager of the London-listed India Capital Growth Fund
“While we expect policy continuity, with the government continuing its investment led economic agenda, it may tweak priorities to support rural consumption and employment. A challenge the new government would however face is that it would need support from its coalition partners in decision-making. This would constrain it in making bold reforms – particularly in areas of agriculture laws and labour reforms. It may also steer away from contentious issues like implementing a uniform civil code etc.

“From a market perspective, we expect a stronger focus towards demand revival in rural India, benefiting consumption stocks. The investment led stocks, particularly the Public Sector Unit (PSU), could see some pull back.”

Thomas Rupf, CIO Asia, VP Bank
“Contrary to the exit polls on which the market had been positioning itself in recent weeks, Modi's party won fewer seats, forcing it to rely on allies to form a government for the first time in a decade, creating uncertainty in the market. The strong negative market reaction was a reminder that despite the benign global equity volatility environment to which investors have become accustomed, emerging market equities carry a higher degree of risk. While near-term volatility is likely to persist until clarity on the new government and policies emerges, India's economy remains robust in terms of growth and inflation is relatively well-behaved.  

“We haven't changed our positioning within emerging markets equities, where we increased China to a tactical overweight in March this year. Given the high valuation and strong positioning of domestic investors in India, we see limited short-term upside and therefore see better opportunities within China. For individual foreign investors investing in India, we emphasise focusing on professionally managed solutions such as funds rather than individual stocks due to the higher complexity of investing in India.”

Jean Chia, global chief investment officer, Bank of Singapore 
“Financial markets have reacted adversely to India’s election results. In the longer term, however, the election results are likely to be positive for India’s economic outlook. Investors should look through the near-term uncertainty and consider the beneficial long-term consequences of India’s surprise election results. We reiterate our neutral position on Indian equities within Asia ex-Japan. Even considering the latest post-election dip in the MSCI India Index, we broadly see valuations to be fairly valued and likely to be range bound over the near term given the disappointing election results.

“Within India, we favour domestic sectors and industries that could benefit from the BJP’s 2024 manifesto, which includes tourism, agriculture, housing, infrastructure, and manufacturing, although we remain wary that policy implementation could face some headwinds given the election outcome.”

Franklin Templeton
“The BJP government will continue to promote the development of India's manufacturing base, especially in the semiconductor and consumer electronics sectors. Public sector infrastructure spending is also expected to slow down, while private sector spending is expected to accelerate. The government will focus on transportation infrastructure, while the private sector will invest in factories, dormitories and renewable power. The government may increase spending and fiscal transfers in rural areas, as well as consider loan forgiveness for farmers, to boost rural incomes and consumption. This is likely to benefit consumer discretionary and staples sectors.”

Abhinav Mehra, portfolio manager at Chikara Investments and co-manager of the Chikara Indian Subcontinent Fund
"The biggest takeaway is that the perceived risk of a disruptive result of a hung parliament or the spectre of another election is now over. While the BJP was unable to reach a majority alone, they still managed a comfortable majority with their core allies which means that we should see a continuity of government and PM Modi. This may have been a political shock, but it bodes well for Indian equities, especially the domestically focused stocks we invest in. Domestic consumption stocks have been the best-performing pocket of the market since the results.

"Longer term, we may see an increased volatility in the next five years than in the previous term. As long as the strong growth rate from the positive capital cycle continues undisrupted, the long-term outlook of Indian equities remains robust – especially compared to so many economies that are highly levered and ageing.”

Mark Matthews, head of research Asia, Julius Baer
“The result shows that India is a democracy, which is something to be celebrated. While the BJP’s power may be diluted, it is still intact. Momentum in the economy from the existing reforms is still strong and will not fade away. It should translate into annual earnings' growth in the low teens, over the next few years. Lastly, on 28 June, India will be included in the JP Morgan Emerging Market bond index, and inclusion in two other bond indices should follow. The result is that tens of billions of dollars should flow into the Indian economy from overseas, over the next two years."