General Election and Market: Weak voter turnout making investors nervous, say experts

With the general elections underway, the Indian market has been very volatile in the last one month. The market's reaction is marked by a blend of nervousness and fatigue, intensifying discussions around potential outcomes and their impact on the market amid the absence of a strong narrative.

While the market has already factored in a Modi win, a key concern remains weak voter turnout. Experts believe that in the next couple of months the market will likely remain volatile.

As per brokerage house Bernstein, the market, which had priced in considerable optimism, now faces growing unease due to lower voter turnout and shifting narratives. Meanwhile, Sunil Damania, Chief Investment Officer at MojoPMS, also pointed out that voter turnout and its impact on the election outcome is making the market nervous.

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In May alone, the Indian benchmark Nifty50 has experienced a significant decline of almost 2 percent, despite hitting a fresh all-time high of 22,794.70 on May 3, 2024. The volatility index India VIX also fell over 98 percent in the last one month. Market sentiment has been subdued due to persistent selling by Foreign Institutional Investors (FIIs), a rise in US bond yields, and concerns surrounding the upcoming election outcome.

Voter turnout and market

As per Damania, the market is going with the equation that lower turnout means the BJP may get a lower number of seats as compared to the 2019 election. "Our study shows that when BJP replaced the Congress in 2014, voter turnout increased by more than 800 bps. Remember, after 1984 first time a single party got majority seats in the parliament, unlike in the past, coalition government was the order of the day. We sense that the BJP should get a majority in the parliament without going into the merit of argument about whether lower turnout is better for the incumbent government," predicted Damania.

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On the other hand, Bernstein highlighted that so far, the average voter turnout for the first three phases is just over 66 percent, closely matching the overall turnout in 2014. In contrast, the 2019 elections saw a decline from 69.6 percent in phase 1 to 61.7 percent in phase 7. Currently, there is no indication of a loss of momentum in turnout, suggesting overall numbers should remain stable if this trend continues.

"Comparisons with 2019 arise because it was the last general election, but the circumstances differ greatly. In 2019, national security issues like the Pulwama incident and Balakot strike galvanized voters. In contrast, the current scenario is more akin to 2014, with a government completing a decade in power and voters deciding on change. Unlike 2019's "pro-incumbency" wave, there is no central voting theme this time," it explained.

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Bernstein also observed that historical data reveals no clear correlation between voter turnout percentages and election results. It noted that a 2-3 percent decline in voter turnout, coupled with anti-incumbency sentiment, might slightly reduce the BJP's tally below 2014 levels. However, a significant decline (over 5 percent) without strong anti-incumbency would likely yield results similar to 2019. Only a substantial drop in turnout, paired with significant anti-incumbency, could create a market-defining event. Additionally, the increased unity of the opposition could start to impact outcomes at this stage, the brokerage added.

Market outlook

Going ahead, Damania predicted that if the market falls before the general election outcome, one can expect a rally post result. But if there is no meaningful correction, the market may behave like in 2019, where Indices moved down post election result.

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"Indian market valuations are rich, and that may keep the upside capped. Post-election, the market will start speculating on the budget announcement. This will also keep marketmen busy. Hence, we sense that in the next couple of months, the market will likely remain volatile," he said.

Bernstein also emphasised that the elections are far from a non-event, having sparked significant market interest and concern. As voter turnout and political dynamics evolve, investors should closely monitor the situation and stay prepared for potential surprises that could impact the market.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.