Contrary to popular views, BJP failed to capture 272 seats on its own but the NDA alliance was comfortably above the majority mark to form the government. The unexpected results triggered a sharp sell-off in the markets overall with headline indices- BSE Sensex and NIfty50- correcting 6 per cent, while the broader markets- BSE midcap and smallcap indices- falling up to 8 per cent.
However, the market participants believe that the knee-jerk reaction on Dalal Street will subside in next few sessions as NDA has the mandate for the third time in a row, and the upcoming Government is unlikely to derail from its medium-term policy direction, commitment to fiscal prudence or growth fundamentals.
Weak income dynamics at the lower-end (K-shaped economy) might have hurt the incumbent. The new coalition may be less decisive than the outgoing one, and the spending push could shift towards rural areas in the near term, said Nuvama Institutional Equities. "However, we do not see the new government backtracking on reforms or resorting to fiscal profligacy," it said.
Nevertheless, emphasis on inclusive growth shall increase, said Nuvama. Markets may have a defensive bias in the near term as valuations of cyclicals are expensive amid weakening earnings and demand outlook, it said.
Nuvama has been maintaining a defensive bias in our portfolio, preferring consumption over capex on the back of weak demand weighing on private capex; general government capex decelerating; and elevated valuations of cyclicals. "Despite a fall of more than 10 per cent in some cyclicals, we refrain from bottom-fishing/changing our stance," it added.
Kotak Institutional Equities expects the new government to continue with its investment-led economic agenda, but it may tweak its priorities to support consumption and employment. We will get a better sense of the same over the next few weeks and in the FY2025 final budget, it said.
"The government may continue with its focus on affordable healthcare and housing, energy transition, infrastructure development and manufacturing. The government has already executed the bulk of the required reforms for incentivizing private investments and execution will be more material," said Kotak.
"We expect a reset in the market’s hitherto cavalier investment stance toward ‘narrative’ stocks. We find the risk-reward unfavorable for these companies, notwithstanding the sharp decline in stock prices on election day. Most of these ‘narrative’ stocks have risen sharply over the past 12-15 months. They offer a large downside to their fundamental fair values and trade at rich-to-bubble valuations," said Kotak.
Stocks including BSE, Suzlon Energy, SJVN, Kalyan Jewellers, Mazagon Dock, Prestige Estates, Rail Vikas Nigam, BHEL, Torrent Power Bharat Dynamics, Oul India, Macrotech Developers, Oil India, Dixon Technologies, JSW Energy, NMDC, PB Fintech, FACT, Oracle Financial Services, Bank of Maharashtra and other rose 100-350 per cent in the last 12 months.
"The election results may finally compel investors to focus more on numbers and less on narratives. We would watch for any change in the stance of retail investors, who have been the major force behind the market in terms of flows. We prefer sectors with high visibility of compounding in earnings/book available at ‘reasonable’ valuations and avoid ‘narrative’ stocks," Kotak adds.
Echoing the similar tone, Motilal Oswal Financial Services said that sectors with over-heated valuations and recent sharp outperformance including industrials, railways, defense, and PSUs may see more moderation in valuations before they become attractive again from the risk-reward perspective.
The brokerage has picked ICICI Bank, ITC, HCL Tech, Coal India, SBI, L&T, Mahindra & Mahindra, Ultratech Cement, Chola Finance and Hindalco from the largecap pack, while it has chosen Indian Hotels, Ashok Leyland, Godrej Properties, Global Health, KEI Industries, PNB Housing, Cello World, and Kirloskar Oil from the midcap pack.
HDFC Securities expect the corrective phase to continue as valuations in domestic cyclicals are stretched compared to historical levels, making risk-reward unattractive, particularly in light of the election outcome. "We expect that the NDA government and delivering a pro-growth budget will soothe investors’ nerves and help stabilise markets in the near term," it said.
"We advise caution and bottom-up stock picking to ride through the volatility. We remain positive on financials which offer the best risk-reward amongst large domestic sectors and are perhaps the only domestic cyclical sector with reasonable valuations. Consumer staples, IT and pharma also look reasonably valued for their quality of earnings and growth," it said.