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The shocking results
India closed its general election on 4th June. Despite predictions of a landslide victory, Narendra Modi's Bharatiya Janata Party (BJP) lost its parliamentary majority, forcing Modi to govern through a coalition. This outcome disrupts Modi's agenda and introduces political complexities that have unsettled financial markets, yet it also promises a brighter future by reducing the risk of autocracy and reinforcing democratic principles.
The BJP aimed for a sweeping victory but secured only 240 seats, losing ground to regional parties and reflecting concerns about unemployment and caste-based politics. Modi's coalition partners, once optional, are now essential for his continued leadership, complicating the political landscape.
The election outcomes underpins a national desire for development over divisive identity politics, highlighting the need for consensus-driven reforms in agriculture, education, and energy policy.
Market sentiment
Immediately after the election, investor scepticism over the weaker-than-expected mandate led major Indian equity indices to dip. The Nifty 50 dropped nearly 6%, and the MSCI India declined over 6%, driven by heavy foreign outflows. However, domestic institutional investors' enthusiasm led to a rebound of more than 3% the next day.
With Modi now needing to govern through a coalition, concerns about sustaining reforms and avoiding populist measures have surfaced. Policy continuity is crucial for global investors, making the upcoming budget the new government's first major test.
What next, for India?
During Modi’s decade in power, India’s equity market has grown over 250%, nearing US$5 trillion in value. With high valuations, the market is one of the most expensive globally, leaving little room for disappointment.
A key risk, investors are thinking about, is a potential slowdown in policy-making under a coalition government, as Modi may need to make concessions to maintain support. Some investors see the weakness in Indian stocks as a buying opportunity, given the country's promising economy driven by a rising middle class and strong demographics.
Historically, Indian stocks have performed well under coalition governments. Despite concerns, many believe the BJP's pro-growth, investor-friendly agenda will continue, supported by India's structural growth drivers.
Historically, Indian stocks have performed well under coalition governments. For example, the MSCI India Index surged over 180% between 2004 and 2014 when a Congress-led alliance ruled the nation. Coalition governments can bring a broader consensus on key economic reforms, which may provide long-term stability.
A coalition government often requires negotiation and compromise, which can prevent the implementation of extreme or populist policies that could disrupt markets. This can ensure a more balanced and moderate approach to policy-making. However, coalition governments can also face difficulties in passing significant reforms due to the need to satisfy multiple parties. This can lead to policy gridlock, slowing down the pace of economic reforms and infrastructure projects, which can be detrimental to market sentiment.
A study of the Nifty 50 index under previous governments shows that market returns are largely unaffected by the ruling party. Instead, a confluence of factors, both domestic and international, is likely to have a much larger influence.
May market commentary
The S&P 500 rebounded sharply in mid-May, posting a return of about 5% and recovering from its worst month since September 2023 to reach new record highs. Inflation for April came in at 3.4%, a slight decline from the 3.5% figure in March. This was the first time this year inflation had cooled, albeit marginally. Job market data for April revealed a deceleration in job creation, indicating that the U.S. economy is not undergoing a new phase of growth. Despite global inflation data proving more persistent than anticipated towards the month's end, investor sentiment improved, with market participants remaining optimistic about potential cuts later this year.
The market rally remained narrowly focused, driven in part by stellar earnings from chipmaker Nvidia, which contributed to a 9% surge for the Magnificent Seven stocks. Additionally, the resurgence of 'meme stock' fervour, reminiscent of the 2021 frenzy, was notable. This wave was triggered by the reactivation of a social media account linked to a key figure from that period, leading to significant retail investor interest and substantial gains for stocks like GameStop and AMC.
In the eurozone, the European Central Bank (ECB) has expressed increased confidence in the economy’s disinflationary trajectory, with wage growth continuing to moderate despite a recovery in economic activity. In May, both headline and core inflation accelerated to 2.6% and 2.9% year-over-year, respectively. Despite this unexpected rise, the recent trend of slowing inflation has enabled the ECB's governing council to signal a high degree of confidence that rate cuts will occur in June, although the future path remains uncertain.
In the UK, headline inflation significantly fell to 2.3% year-over-year in April. However, services inflation remains high at 5.9%, making any hopes of a June rate cut from the Bank of England appear premature. Meanwhile, the Bank of Japan is facing a contrasting situation, where rate hikes seem necessary to support a weak currency, but excessive tightening could jeopardise the return of reflation.
Global equities resumed their upward trajectory in May after a temporary correction in April. Stoxx 600 reached a new all-time high mid-month, while UK stocks and the Nikkei also rose on positive sentiment.
During the month, developed markets outperformed emerging markets. After a strong start to the year, Hong Kong and Chinese mainland stocks fell back in May, as supportive economic data was partially offset by the prospect of additional U.S. trade tariffs on various industries.
In terms of factors, in a surprising move, small caps outperformed large caps in most regions, except in the US, where US small caps trailed US large caps by a slight margin. US value stocks were, once again, unloved as growth stocks, led by Nvidia, went on a tear, outperforming by more than 3.5%. Elsewhere, outside of the US, value outpaced growth.
In May, government bond markets diverged. U.S. Treasury yields fell from their year-to-date highs, outperforming European markets where yields rose. Positive inflation data, weaker growth signs, and softer labour market indicators supported U.S. bonds, with Fed Chair Jerome Powell suggesting rate hikes were unlikely. Renewed confidence in potential Fed rate cuts bolstered credit markets, with U.S. investment-grade corporates outperforming European counterparts. Both U.S. and European high-yield bonds performed well, driven by a constructive economic backdrop and tightened spreads between financials and non-financials.
The S&P GSCI had a difficult month in May, retracting by 1.9%, in USD terms. The weakest performing sectors were Energy and Crude oil.
Building a long-term resilient portfolio with Endowus Hong Kong
The strong market rally in November caught many by surprise, after a dismal consecutive two months in September and October. It is therefore almost impossible to predict exactly how macro events would play out, even for many market strategists.
However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.
With the digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.
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