India’s general election took a surprise turn, with the ruling NDA expected to return to power with a reduced majority and the BJP well below its majority, causing the Indian stock market to fall by nearly 6%.
In a recent report, brokerage Emkay believes that at a P/E ratio of 19.5x, the correction is still not enough. At current levels, the brokerage is neutral on the stock and will remain invested but will not add to its position. If the Nifty declines by another 10% to below 20,000, the firm believes the market would become attractively valued at sub-18x P/E, providing another entry opportunity into Indian equities.
“We believe Narendra Modi will return as PM with the situation changed. The overall direction of the economy will remain the same, but factor market reforms and privatisation are off the table. India is likely to be downgraded going forward due to increased risk perception. If Nifty falls below 20,000 (18x FY25 P/E), switch from SOEs and capital goods to FMCG and buy Indian equities,” MK said.
The firm expects the market to decline in the near term due to heightened risks to India. State-owned enterprises and capital goods are the most vulnerable sectors and investors are advised to stay away from these sectors for the time being. Meanwhile, it believes consumption should recover and FMCG and budget retailers are posting strong earnings. The firm is also positive on healthcare.
Indian markets experienced a dramatic reversal on Tuesday, June 4, hitting their worst close in over four years, wiping out the gains seen on Monday. The decline was triggered by opinion poll trends that showed the incumbent Narendra Modi-led NDA government was facing a tougher fight than expected.
The S&P BSE Sensex fell 4,389.7 points or 5.74 percent to close at 72,079. Similarly, the NSE Nifty 50 fell 1,379.4 points or 5.93 percent to close at 21,884.5.
In intraday trade, the Sensex index plunged 6,234.35 points or 8.15 percent to 70,234.4, while the Nifty index tumbled 1,982.45 points or 8.52 percent to 21,281.4. These figures are the biggest intraday drop in the last four years since March 23, 2020.
Adverse outcomesThe ruling NDA, which exit polls had predicted would win a much larger majority, is now expected to return with a smaller majority than it did in 2019. On current trends, the NDA could win 290-300 seats, well above the 272-seat majority. Even more surprising is that the BJP alone is expected to fall well short of a majority, at around 230-240 seats.
Modi returns with changed circumstances: The brokerage further emphasised that Prime Minister Narendra Modi will return for a third term as Prime Minister but will have to deal with changed circumstances. First, the BJP will rely on regional allies such as Telugu Desam and Janata Dal (United) and adjust its policies accordingly. Second, there will be increased demand from both the BJP and its allies to stimulate consumption in the economy. There is an unusual possibility that the Opposition will come to power if some of the BJP’s existing allies defect, but this is unlikely, the brokerage said.
The economic trajectory is unlikely to change: Despite the decline in the majority, the broad pillars of momentum for the Indian economy will remain unchanged, Emkay noted. The focus on manufacturing, in particular, will continue given its importance in job creation. There may be a subtle return to consumption stimulus, but the brokerage sees it as not material. While state fiscal deficits may worsen, it sees little risk to central fiscal deficit consolidation. The capex cycle will also slow as governments pivot (slightly) towards restrained spending, and corporates may go into wait-and-see mode for a few quarters. Finally, the brokerage expects unprecedented macro-financial stability to continue, with little risk of twin deficits or bank/corporate balance sheet collapse.
Reforms in DangerFactor market reforms related to land, agriculture and labour are currently off the table, Emkay said. Privatisations and asset liquidations are also at risk and could weigh on government capital expenditure in the short term, Emkay said. Some political reforms, such as electoral uniformity (which would require significant constitutional reform), also now seem unlikely, he added.
Disclaimer: The views and recommendations expressed above are those of the individual analysts or brokerage firms and not those of Mint. We recommend checking with a qualified professional before making any investment decisions.
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