Decoding the General Election and Growth Story for India

31 May 2024

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova

The biggest democratic elections ever witnessed in the world is underway in India, as the population participates in polls, phased in 7 parts over the length of two months. This has led to a jump in volatility and intense action in all major Exchanges in the world’s most populous democracy. So, does that make investing in Nifty 50 a potentially lucrative option right now?

Having index funds in your core portfolio is beneficial in the bull market, but why the Nifty you wonder? Indian markets have been performing exemplary throughout 2023 with Sensex and Nifty posting 18% and 20% gains respectively. If that’s not impressive enough, in the fiscal year 2024, Nifty posted enormous gains of 30%. So if you’re a retail investor trying to build an equity portfolio, should you be interested in exposure to Indian markets through GIFT Nifty futures?

India’s largely domestically driven growth provides a cushion against external shocks as a growing number of domestic retail investors add depth to the market. Additionally, India’s global market share of initial public offerings (IPOs) across sectors rose to an all-time high in 2023, outpacing Hong Kong, amid a global slowdown led by a slump in US listings, another promising cue of resilience.

Bear in mind that even financial gurus like Warren Buffet struggled to match returns on the S&P Index last year. India’s main market index, the Bombay Stock Exchange’s Sensex, has been experiencing a strong upward trend since the pandemic eased. The question arises: is there still room for further growth? From a bird’s-eye view perspective, with a forecasted GDP growth of 6.5% in 2024, Indian markets outshine anything offered in the West at this point. India’s banking reforms and the clean-up of bank balance sheets have created a strong banking picture and opportunities for investors.

Our medium-term and long-term view on Indian markets continues to be robust with an impressive economic growth potential, priced in stability after the General Elections 2024, and a strong boost in retail investor participation in financial markets! However, just a few days before the results, it is advisable for GIFT Nifty investors to consider the volatility as the most important factor. The market broadly anticipates “5 more years of Modi” as an outcome of the General Elections that will prove to be a boon to Indian assets including equities.

Under Modi, whose premiership began in 2014, reforms across banking, manufacturing, and inflation management, coupled with a focus on physical and digital infrastructure, have boosted the long-term growth potential of the economy. If the “Make in India” initiative is well capitalised for the next five years, India will be able to create an ecosystem comprising self-sufficient manufacturing and employment, freeing itself from dependence on imports.

In 2023, India’s population surpassed China’s, and it currently has one of the youngest demographics globally, with a median age of 28 years. This sizable labor force can not only assist India in reaching its short-term domestic growth objectives but also unlock the spending potential of the country’s youthful population, contributing to stellar economic growth.

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An Exchange Traded Fund (ETF) is a marketable security that is formed to track nearly anything, ranging from a specific index, sector, commodity, or increasingly, theme. They are most commonly used to track a basket of stocks, and can typically be accessed through the same channels as regular stocks. ETFs are typically separated into passively-managed ETFs that simply mirror the security they are tracking (e.g. the STI), and actively managed ones that attempt to deliver higher returns or specific investment objectives, often with a pre-specified theme in mind (e.g. ARK Invest’s Innovation ETF).

Why should I trade in ETF CFDs?

ETFs have been growing in popularity over the years. 2020 was the best year for ETFs yet, with global equity ETFs seeing more than $1T in inflows within a 12-month period. Using CFDs to gain exposure to ETFs allows for greater capital efficiency because only a portion of the contract value is required as margin to establish a position.
ETFs are particularly popular with investors seeking a relatively hassle-free investing experience, while desiring exposure to a range of specific and relatively understandable securities. Trading ETF CFDs brings greater convenience by eliminating the need for traders to hold multiple currencies in order to access global ETFs.
An investor wanting exposure to the post-pandemic economic recovery could open a position in the well-known SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500. Another investor that may be convinced of the future importance of Environmental, Social and Governance concerns (ESG) may find the increasing selection of ESG-themed ETFs that track a basket of high ESG-rating companies to be a good investment, rather than cherry-picking individual equities by hand. ETF CFDs can act as a powerful tool for traders can profit from both directions of the market by taking on long or short positions.

A look at two ETF CFDs we offer:

1) Has the ARKK been sunk?

ARK Innovation ETF (ARKK) ARKK is an actively managed ETF by ARK Invest that invests in a range of companies based on their innovative and industry-disrupting potential. ARKK’s largest holdings are in companies such as Tesla, Square, and Zoom. ARKK is down around -33% from peaking on 12^th Feb and is currently in the red for the year to date as the market experiences a risk-off outflow of funds. Superstar fund manager Cathie Wood has however been consistently doubling down on her bets, buying even more shares in growth stocks that are going through their own tumultuous periods such as DraftKings, Peloton, Teladoc, and Tesla. In her view, ARKK is playing the long game, and remains steadfastly convinced in the long-term prospects of these growth stocks beyond this current bout of volatility. Similarly on outflows, investors are still betting big on ARKK as ARK Invest has only lost about $1.2B in assets this year across all its six funds, compared to seeing an inflow of $15.1B during the same period. Recently, investors have been nervously eyeing ARKK’s basket of tech stocks as their future earnings potential remain vulnerable to erosion through high inflation – the dominant concern of the market in recent weeks. As commodities – the major contributor to the recent heightened inflation fears – drops sharply from record highs, are investor concerns over hyperinflation overblown?

2) Searching for exposure to Asian equities?

iShares MSCI Asia ex Japan ETF (AAXJ) The AAXJ is currently trading -10.6% adrift of all-time highs seen in February, giving up gains in tandem with an Asia-wide equity sell-off at the time. Given that slightly over 40% of the ETF’s holdings are based in China, the ongoing tumult seen in Chinese equities currently have carried over nearly perfectly in the AAXJ, as Chinese investors take a breather after the stellar gains made over the past year. Looking ahead, Asia – and particularly China, is steaming ahead with its economic recovery. China is widely expected to be one of the best-performing major economies this year, providing a major boost to the outlook for corporate earnings. As the rest of Asia and the world gradually opens up their own economies, AAXJ is likely to again benefit from strong Asian outperformance amidst a strengthening trade outlook.

CFD is available for trading on Phillip MetaTrader 5 (MT5).

Features of trading CFD:

Trade in both the bull and the bear markets
The ability to enter a long and/or short position allow traders to take advantage of both rising and falling markets.
Smaller barrier to entry
Flexible and smaller contract sizes. This means that traders will be able to enter into a contract with a modest amount of capital.
No expiration date or risk of delivery
Unlike futures which commonly have a fixed expiration date, CFD allows traders to perpetually hold the position(s). CFD is cash settled, no need to worry about the delivery of the underlying asset.

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