Synopsis: Kotak Institutional Equities predicts the new government will maintain its investment-led economic strategy, with possible adjustments to support consumption and employment. Despite the BJP not securing 272 seats independently, the NDA alliance comfortably achieved a majority. Unexpected election results caused a significant market sell-off, but this reaction is expected to subside as the NDA's continued mandate suggests stability.
Kotak Institutional Equities anticipates that the new government will continue its investment-led economic agenda, though it may adjust priorities to support consumption and employment.
Contrary to popular belief, the BJP did not secure 272 seats on its own, but the NDA alliance comfortably surpassed the majority mark to form the government.
The unexpected results triggered a sharp market sell-off, with headline indices BSE Sensex and Nifty50 dropping 6%, while broader markets, including BSE midcap and smallcap indices, fell up to 8%.
However, market participants believe this reaction will subside in the coming sessions as the NDA's third consecutive mandate suggests stability in medium-term policy direction, fiscal prudence, and growth fundamentals.
Weak income dynamics at the lower end of the K-shaped economy may have impacted the incumbent government.
Nuvama Institutional Equities suggests the new coalition may be less decisive than the previous one, with a spending shift towards rural areas expected in the near term.
They do not foresee the new government reversing reforms or resorting to fiscal profligacy, but expect a greater emphasis on inclusive growth.
Markets may adopt a defensive bias in the short term, as cyclicals' valuations are high amidst weakening earnings and demand outlooks.
Nuvama maintains a defensive portfolio preference, favoring consumption over capital expenditure due to weak demand, decelerating government capex, and elevated cyclicals valuations.
Despite a more than 10% drop in some cyclicals, they advise against bottom-fishing.
Kotak Institutional Equities expects the new government to persist with its investment-driven economic agenda, potentially tweaking priorities to bolster consumption and employment.
Clarity on this may emerge in the next few weeks and with the FY2025 final budget.
The government is likely to continue focusing on affordable healthcare and housing, energy transition, infrastructure development, and manufacturing, with execution being more critical than new reforms to incentivize private investments.
Kotak foresees a market reset regarding 'narrative' stocks, finding the risk-reward balance unfavorable despite sharp price declines on election day.
Many 'narrative' stocks have risen significantly over the past 12-15 months, and now trade at high-to-bubble valuations, posing a large downside risk to their fundamental fair values.
Stocks such as BSE, Suzlon Energy, SJVN, Kalyan Jewellers, Mazagon Dock, Prestige Estates, Rail Vikas Nigam, BHEL, Torrent Power, Bharat Dynamics, Oil India, Macrotech Developers, Dixon Technologies, JSW Energy, NMDC, PB Fintech, FACT, Oracle Financial Services, and Bank of Maharashtra have increased 100-350% in the last 12 months.
The election results may shift investor focus from narratives to numbers.
Kotak advises watching for changes in retail investor behavior and prefers sectors with high earnings/book compounding visibility at reasonable valuations, avoiding 'narrative' stocks.
Motilal Oswal Financial Services echoes this sentiment, suggesting that sectors with overheated valuations and recent outperformance, such as industrials, railways, defense, and PSUs, may moderate before becoming attractive again.
The brokerage recommends ICICI Bank, ITC, HCL Tech, Coal India, SBI, L&T, Mahindra & Mahindra, Ultratech Cement, Chola Finance, and Hindalco from the large-cap category, and Indian Hotels, Ashok Leyland, Godrej Properties, Global Health, KEI Industries, PNB Housing, Cello World, and Kirloskar Oil from the mid-cap category.
HDFC Securities expects the corrective phase to continue, as domestic cyclicals' valuations are stretched compared to historical levels, making risk-reward unattractive, particularly in light of the election outcome.
They believe the NDA government delivering a pro-growth budget will calm investors and stabilize markets in the near term.
HDFC advises caution and bottom-up stock picking to navigate volatility, remaining positive on financials for their favorable risk-reward among large domestic sectors, and highlighting consumer staples, IT, and pharma for their reasonable valuations relative to earnings quality and growth.
In conclusion, Kotak Institutional Equities anticipates that the new government will persist with its investment-led economic agenda while adjusting priorities to boost consumption and employment.
Despite initial market turmoil following unexpected election results, stability is expected to return as the NDA maintains its mandate.
Nuvama Institutional Equities and other analysts foresee a defensive market stance due to high valuations and weakening demand.
Emphasis is likely to shift towards inclusive growth and rural spending without reversing reforms or fiscal prudence.
Market participants are advised to adopt a cautious, bottom-up stock-picking approach, favoring sectors with strong earnings visibility and reasonable valuations.
Disclaimer: We provide stock market news for informational purposes only and the information presented in this article should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.
Related Questions
1. What was the unexpected outcome of the recent election in terms of BJP's performance, and how did the market react?
The BJP did not secure 272 seats on its own, but the NDA alliance comfortably surpassed the majority mark to form the government. The unexpected results triggered a sharp market sell-off, with headline indices dropping 6% and broader markets falling up to 8%.
2. What are the expectations regarding the new government's economic agenda, according to Kotak Institutional Equities?
Kotak Institutional Equities anticipates that the new government will persist with its investment-led economic agenda, potentially adjusting priorities to bolster consumption and employment.
3. How do analysts expect the market to respond in the short term, and what factors are influencing this?
Analysts expect a defensive market stance due to high valuations and weakening demand. Emphasis is likely to shift towards inclusive growth and rural spending without reversing reforms or fiscal prudence.
4. What cautionary advice do analysts offer to investors, especially regarding certain stock categories?
Analysts advise caution and bottom-up stock picking to navigate volatility, avoiding 'narrative' stocks that may have high valuations and pose significant downside risks.
5. Which sectors and specific stocks are recommended by analysts for investment amidst the current market scenario?
Analysts recommend sectors like financials, consumer staples, IT, and pharma, along with specific stocks such as ICICI Bank, ITC, HCL Tech, SBI, and L&T, among others, for investment.
