Sensex, Nifty may correct another 10-20%; India 'premium' may hit hard

The Indian equity market took a hard beating after the Lok Sabha 2024 results failed to match the expectations of Dalal Street with a wide margin. Benchmark indices on Tuesday saw a sharp correction as Narendra Modi-led Bharatiya Janata Party (BJP) failed to cross the victory mark of 272 seats on its own and was left short with 240 seats.
 

The surprising electoral mandate triggered a sharp selling at the Street across all the sectors and segments. BSE Sensex tanked 4,389.73 points, or 5.74 per cent to settle at 72,079.05. NSE's Nifty50 nosedived 1,379.40 points, or 5.93 per cent, to end at 21,884.50. In the broader markets, the BSE midcap index crashed over 8 per cent, while the smallcap index tumbled 7 per cent.
 

Market experts said that the uncertainty over the agenda of the newly formed government amid the unclear mandate to a single party may trigger some volatility in the short-term and further correction in the stocks cannot be ruled out. Investors may see some bouts of buying and selling over the next one year and suggested that investors be cautious in their approach.
 

Indian equities came down sharply as the ruling party suffered a setback in the polls. While BJP should be able to form the government again, but the reform agenda of the government may go into the backburner, said Amit Goel, Co-Founder & Chief Global Strategist at Pace 360, a Sebi- registered multi asset PMS.
 

"We believe investors should stick to the fundamentals and buy only the stocks with reasonable valuations. We believe Indian equities will go into a bear market and will fall by more than 20 per cent by April 2025. Hence, investors should buy only when the market is deeply oversold and that too for the short term to medium term only" he said.
 

Investors would do well to avoid the sectors which were market favorites till yesterday as the focus of the government may change. Consumer based stocks would do well from now on as the government would try its best to repair the urban consumer and rural distress, added Gupta from Pace 360.
 

Seconding Gupta's views, a few other market experts believe that the market may correct further before deciding a course of actions and suggested investors not to buy stocks at high premium. However, they do not abide by the notion of an end to the bull market in India and suggested being patient with a long-term view.
 

Indian equity valuations were quite rich already, and election result day presented it with the perfect reason for correction, said Amar Ambani, Executive Director at YES Securities, adding that another 10 per cent correction cannot be ruled out, based on the market multiples. This is not the time to pay big premiums on stocks, he said.
 

"As long as a stable coalition is put in place, markets will settle down after a while. In the new scheme of things, we need to assign a lower valuation multiple, to factor in coalition risks and its impact on the reform path. It is important for investors to be sure about their stock selection and buy only reasonably priced companies with earnings visibility," he said.
 

Other analysts believe that the National policy thought process could change sooner than later. The stress in mass-market consumption may come into focus for the new government, which may continue its roadmap for infra and capex but with some room for the populist measures, said the global brokerage firm UBS.
 

Commenting on the valuations of the Indian markets, UBS said that this was not an election outcome, where the market valuations were set up for India. India valuations have been expensive for ordinary corporate earnings and growth outlook.
 

UBS said that rich valuations were backed by the political stability and policy certainty, given by a strong government backed by a single party and now some assumptions may be under the spotlight in the new government. "We remain underweight on India in the emerging market context," said the overseas brokerage firm.
 

There is a bit of uncertainty as investors are concerned about the slowdown of reforms that had been initiated under the BJP-led government. This uncertainty has triggered a correction in the markets as investors reassess the outlook under the new political landscape, said Vinit Sambre, Head of Equities at DSP Mutual Fund.
 

"We would like to believe that the development agenda that spurred the performance of equity is likely to persist, irrespective of the party in power. Some of the reforms implemented are integral to long-term growth. Once the initial shock subsides and market sentiment steadies, the markets are anticipated to regain stability," he said.
 

Commenting on the uncertainty subsiding, Ajay Menon, MD & CEO, Broking & Distribution, Motilal Oswal Financial Services said that volatility around the outcome to reduce over the next few days and market focus to return on macro and fundamentals which continue to remain strong.
 

"Once the new government is formed, it will present its first and full budget for FY25 in the next few weeks, where themes like capex, manufacturing, rural, consumption, and credit lending will be back in focus. The rural and consumption theme would also pick up pace with the onset and progress of Monsoon, which is predicted to be above normal this year," he said.