Coalition Government Raises Policy Uncertainty Concerns, Brokerages Warn Of Near-Term Volatility
Emkay has turned defensive on markets and has cut the Nifty target from 24,000 to 22,000.
Brokerages turned defensive on Indian equities with near-term volatility after the outcome of tighter-than-expected 2024 Lok Sabha elections as a coalition government might cause policy uncertainty.
The Narendra Modi-led National Democratic Alliance returned to power for the third consecutive term, but the Bharatiya Janata Party failed to cross the simple majority on its own.
The election outcome will likely increase near-term volatility and risk perception, impacting market multiples in the near term, according to a note by Citi Research. "We expect continued, albeit calibrated, policy focus on infra, increased focus on rural."
The Indian equity markets had approached the national elections with a lot of conviction in the continuity of a strong BJP government. The election verdict questions this conviction and raises doubts over a stable government and policy-making styles, CLSA said in a note.
These doubts openly question the notable premium of Indian equities versus history, compared to bonds, the near-record premium of SMIDs and the "recent re-rating of Modi stocks", according to CLSA.
Emkay has turned defensive on markets and has cut the Nifty target from 24,000 to 22,000, implying near-zero returns for the market in 12 months.
Bernstein said continuity of power is a powerful enough narrative to support the economy. "We also think that while some focus on subsidies at the expense of capex is likely, we do not see a material impact in the near term."
The brokerage has retained their view of high single-digit returns, with the Nifty target unchanged at 23,500. "We see volatility to remain a feature, given uncertainty on policy path." In a very short-term perspective, the market sell-down has been a bit extreme, which leaves room for a modest rebound, with capex-linked stocks leading that, it said.
CLSA On Election Outcome
BJP lacking simple majority raises doubts over stable government and policy-making styles.
Nifty remains 19 times above 18- historical average price to earnings even after the pullback.
Replaces Larsen & Toubro Ltd. with HCL Tech in India portfolio.
Preferred sectors are private banks, IT, insurance, commodities.
ITC remains the brokerage's preferred staples stock.
Exposure to "Modi stocks" are limited to Oil and Gas Corp., Reliance Industries Ltd. which saw less than 15% re-rating in the last six months.
Brokerage fears de-rating in expensive discretionary, capex space.
Prefers valuation support in private banks.
Citi On Election Outcome
FY25 fiscal deficit could remain at 5.1% of the GDP.
Available fiscal space could be spent on rural/welfare-focused schemes.
Capex focus could remain and a broad agenda of infra, manufacturing, technology focus could continue.
Contentious reforms could be delayed.
Rates market would focus on commitment to the fiscal glide path.
The election outcome will likely increase near-term volatility in equity and risk perception, impacting market multiples in the near term.
Expects continued, albeit calibrated, the policy focus on infra, and increased focus on rural.
Emkay On Election Outcome
The brokerage turns defensive on Indian equity markets.
Cuts Nifty target from 24,000 to 22,000, implying near-zero returns for market in 12 months.
Turns underweight on industrials and downgraded real estate.
Upgraded FMCG, IT, and healthcare to 'overweight'.
Retains 'overweight' on durables, with greater focus on original equipment manufacturers over ancillaries
Dips below 20,000 to be a trigger to enter the market.
Does not see an extended bear market and shifts near-term preference to large, and top-end midcaps
From a two-three–year perspective, retains SMID preference.
