Vault Digest 1 | Enhancing Foresight for the New Dawn

Dear Reader,

Election season is riveting.

The tables turn. Fueled by the superpower of the vote, citizens of the constituency transform into their superhero alter egos. For once, the consumer becomes the decision-maker. For once, our destiny lies in our hands. We vote and then wait anxiously for the new regime, almost expecting the first sunrise under our new government to have different colours.

While that is a slight exaggeration, an election is a solid shake-up of our society. Every sector is uniquely impacted. Business owners and investors must develop enhanced foresight for the new dawn, and counting on exit polls may not be adequate. This month’s Vault Digest intends to bring a holistic perspective towards the democratic festival.

Vault is Waterfield's monthly newsletter; it is a collection of meaningful thoughts on business, finance, technology, climate, lifestyle, and everything wealth. Vault offers you 18 minutes of brain-feeding break every month, leaving you with big-picture ideas.

This month, we are sharing the election outlook from the Waterfield CIO’s desk, evaluating the economic impact of global elections, thinking about how an investor should vote, and more.

Have a thought-provoking read!

I. This month's big story

India's 2024 General Elections: This time it is different

India underwent 11 government changes, with coalitions leading in eight instances. A significant shift occurred in 2014 when the Bharatiya Janata Party (BJP) gained a clear majority, a position it has maintained since. This political stability has been mirrored in economic indicators. From 1980 up to December 2023, India's average real GDP growth remained robust at 6.2%. The stock market reflected this economic vigour, with the Sensex exhibiting a compound annual growth of 9.5% in dollar terms and an even more impressive 15.5% (1978 – 2023) in rupee terms.

Breaking Patterns: Anticipating the 2024 General Elections

Considering recent polls, we look at three possible outcomes for the upcoming election:

a) a BJP-only majority;

b) a coalition led by the BJP; and

c) a weak coalition led by the current opposition parties.

We are not assigning any probability value to these outcomes in this note. However, the first two outcomes, seem to be mostly priced in by the market, based on our conversations with investors and the market’s valuation multiples.

In the first scenario, the focus would be on policy continuity, which could bode well for business sentiment and the much-anticipated private corporate capex recovery. In addition, further progress in supply-side reforms could be seen, including the clean energy transition, higher infrastructure spending (both digital and physical), a manufacturing push and other targeted policy initiatives (towards the youth, poor, women and farmers).

In the second scenario, reform momentum remains broadly similar, but some tough policies may not progress and/or are likely to be put on hold (including disinvestment, a land bill and a uniform civil code). However, comfort about fiscal discipline could be less of a concern for investors in this scenario.

In the third scenario, the economic policy approach would be largely aligned, but markets could have concerns about fiscal discipline and a less decisive government, leading to lags in implementing supply-side reforms. There could also be a delay in the private corporate capex recovery due to weaker business confidence caused by the surprise political outcome.

However, the market, seemingly confident in Prime Minister Modi's victory, has likely already factored in the first or the second outcomes. This reduced element of surprise, compared to previous elections, could lead to a different market response. Additionally, a decline in NIFTY return volatility over the last five elections supports the expectation of a similar trend in 2024.

While immediate market reactions are likely, the long-term economic trajectory of India would depend more on broader global trends, demographic factors, and the inherent resilience of its economy and institutions.

II. Handpicked Goodreads for you

(i) How the world’s record share of elections will ripple through the economy

What happens to government spending in an election year? How has fiscal policy been affected historically? How has monetary policy been influenced across the globe? This Goldman Sachs article shares interesting findings.

(ii) Investments that get my vote in this election year

Undoubtedly, the state of the economy can have a big influence on who is elected. But what about the other way? Do changes in government make much difference to stock markets or sectors? A must-read opinion piece.

III. Data to ponder upon

Historical trends indicate that election years often bring a surge in market activity, with the last five national election years showing consistently positive equity returns.

IV. Upcoming must-attend events for UHNIs

• US Open Golf Tournament, North Carolina, USA - 10th June onward
• Art Basel, Basel, Switzerland - 13th-16th June
• Aspen Food & Wine Classic - Colorado, USA - 14th-17th June

That's it for this month. As we prepare to use our voting superpowers, let's remember that with great power, comes great responsibility.

Happy voting!

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