BJP, election results: Bernstein says stock market selloff a bit extreme, modest rebound likely

Bernstein in its latest strategy note said Indian voters are great teachers and that they certainly surprised the politicians, exit pollsters and market watchers in the recently concluded Lok Sabha elections 2024. From expectations of a victory even larger than 2019 to a situation where a clear majority for BJP on its own looks difficult, India has flipped 180 degrees within one day, it said. But the brokerage called the market sell-down as a bit extreme from a very short-term perspective. It sees room for a modest rebound, with capex-linked stocks leading the recovery.

Bernstein retained its view of high single-digit returns, with the Nifty target unchanged at 23,500. It expects volatility to remain a feature given uncertainty on policy path. It is overweight on financial stocks but have selective picks across sectors.

Bernstein said with the BJP not garnering a majority, it increases dependence on its allies. It noted that as the allies were established as pre-poll ones and there were seat-sharing arrangements, they are likely to stick to NDA and go ahead with the rituals of forming a government. 

"There are no contentious topics, as the NDA had a consensus on policies. In an extreme scenario, if the opposition manages to wrest away the key allies, the investment approach to India would change materially. As we consider it a low-probability event, we do not delve much into this topic," it said.

Bernstein said the BJP setback may, however, be enough to change the government's focus and push it to tweak some of its policies and increase spending towards direct social schemes. 

"With capex likely to be driven more by the private sector as end markets are changing, the role of government will in any case moderate over time, limiting material risks to the cycle," it said.

It said the continuity of power is a powerful enough narrative to support the economy. While some focus on subsidies at the expense of capex is likely, Bernstein do not see a material impact in the near term. 

"Given what we see - our previous stance on the market holds good. This is about decent economic growth but a peaking of earnings growth, less room for upward revisions and somewhat rich valuations. Hence, we retain our view of high single-digit returns, with the Nifty target unchanged at 23,500," it said.