What’s beyond Modi’s coalition government for investors?

From a shocking 7 percent fall on the day when election results threw a surprise on the magnitude of victory for the incumbent, the benchmark index is back at a new high.

Given the performance of the stock market, even if the Securities & Exchange Board of India begins a probe into whether Prime Minister Narendra Modi and Home Minister Amit Shah misled investors as alleged by political opponent Rahul Gandhi, it may be a challenge for the regulator to prove any violation.

Amid this debate the fund flows into Indian equities is telling a different story. While domestic investors are keeping faith in equities as an asset class, global investors who have a much larger pool of options are having different thoughts.

There is confidence that even if Narendra Modi has to accommodate demands of political allies, the difference could be in the economic versus political agendas.

``All solutions to electoral losses need not be translated into populism and away from a macro framework built over the last decade,’’ said Suvodeep Rakshit, economist at Kotak Institutional Equities. ``We expect the government to remain fiscally prudent and populism to be used opportunistically.’’

While domestic institutions have bought stocks worth a billion dollars this month, FIIs have sold nearly $1.4 billion, data from Bloomberg and Kotak shows.

Historically, investors have been taking political and health shocks in their stride as they did with the Russian – Ukraine war or Covid.

A bigger relief for investors in the current context is that inheritance tax, wealth tax, thoughtless welfare schemes, and anything that could cripple businesses in the name of economic equality are reduced with Modi’s return.

The economic agenda even under Manmohan Singh’s coalition government rolled on though at a slower pace returning 350 percent to investors.

Modi’s track record of sticking to macro prudence on spending even during Covid time when most developed economies splurged provides hopes that he need not turn to populism as the popular belief is.

``Given the solid starting position for the government's books, a large RBI dividend and higher tax collection, we think the fiscal deficit target will remain at 5.1% of GDP, with the borrowing programme likely to be unchanged,’’ said Shreya Sodhani, economist at Barclays.

While the macro-economic policy path of the government may be as smooth as it has been in the past decade, the turbulence for investors could be elsewhere. What is ignored till then – valuations – would suddenly be discovered.

The benchmark Nifty is at more than 21 times forward year earnings which some consider at Rs. 1,093 may be optimistic. Midcap index is trading at 30 times compared with a 10-year average of 21.3 and the Smallcap Index is at 19 times against the decade average of 15.7, data from Motilal Oswal Securities shows.

Events like the Global Financial Crisis or the taper tantrum trigger a wave sell off, but it was the steep valuations that amplified the market crash aggravating investor pain. The Covid triggered liquidity has lifted all the boats, and valuations.

While Modi’s coalition may be in the backdrop, investors may have to watch the central bank actions – as the European Central Bank begins to ease, the Federal Reserve is yet to signal the timing of its next move. Probably, events beyond India’s shores may be more significant than the coalition government for investors in the months ahead.