Election times have been usually good for benchmark indices, at least in the first few months. But market participants seem to be unusually nervous this time around.

Both the key benchmark indices – Sensex and Nifty – had risen barely 2.4% and 3.5% respectively till last weekend – the worst performance since 2004. The gains are also due to the last few sessions when the market mood seems to have improved. The India VIX – the measure of volatility expected in the next 30 days – is up 40% to 20.5.

Interestingly, except in the 2004 elections, when the benchmark indices were trading in the negative in the aftermath of the Iraq war, the General Election period has usually been stock investor friendly.

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Sample this: Since 1996, indices have given double-digit returns during the January-May (18th) period four times and single-digit returns thrice. The 2004 elections was the only blip when indices fell 16%.  

“The previous three (Lok Sabha) election years happened after a relatively weak time for markets. This is one of the first elections after a bumper year. So, the odds are stacked against it,” said Pramod Gubbi, founder of Marcellus Investment Managers.

There are other factors too that are keeping the market on the edge. When the calendar year started, bulls were certain that the incumbent government will get a strong mandate in Lok Sabha elections and the US Federal Reserve would soon begin lowering lending rates. Both these factors have not played out as expected.

There seems to be some uncertainty over the number of seats that the incumbent government can garner. The Federal Reserve has deferred rate cuts. Other factors weighing on the market include the geopolitical crisis in Middle East and the comeback of China as an investment destination.    

Given these factors, and valuations of the Indian market being among the highest globally, investors, particularly foreign institutional investors (FIIs), have decided to take some money off the table.

FIIs have net sold shares worth around Rs 28,500 crore so far in May, making it one of the worst months in recent years from a foreign fund flows perspective.

Despite the worries, Andrew Holland, chief executive officer at Avendus Capital, still sees the possibility of 12-15% returns from benchmark indices this year. Gubbi too said that although there are challenges, it does not mean markets will have a bad year.

If interest rates remain at the current levels for much of the year, experts believe Indian equities may not be as attractive a proposition for FIIs considering valuations. However, if the domestic economy remains strong, private capex picks up pace, and earnings growth shows strength, they can propel FIIs to return to India.

Experts believe earnings growth will be a key factor in determining how market behaves going ahead. The March earnings season so far has been in line with expectations, but many believe they do not justify the “extraordinary” valuations.

“For the IT sector, worst doesn’t seem to be over. We have had the Federal Reserve say higher for longer, which means there is really no tailwind for the IT sector,” said Andrew Holland, chief executive officer at Avendus.

Holland added though the worst seems to be behind for banks when it comes to net interest margins (NIMs), the sentiment has been hit due to the regulatory action on Kotak Mahindra Bank and draft norms on project financing.

In all, Indian equities are in for a challenging ride in 2024. Although strong domestic economy is providing the much-needed cushion, several other factors like earnings growth and private capex will need to pick up pace for a clear path to double-digit returns.