The general elections results in India came as a surprise, with the BJP falling well short of a majority and the incumbent NDA expected to return, but with a smaller majority. The Indian markets experienced a decline of over 6% as a result.
Brokerage company Emkay stated in a recent study that it doesn't think the correction is quite severe enough at 19.5x PER. The firm is neutral on stocks at the moment and would continue to be involved without adding to its positions. The market is fairly valued at less than 18 times PER, and the Nifty may face another 10% correction to below 20,000, providing a chance to reenter the Indian equity market.
"We see a different Narendra Modi returning to the prime ministership. Though privatization and reform of the factor market are off the table, the overall path of the economy is not expected to change. India's sense of risk is projected to increase, leading to a decline.Invest in Indian stocks and move from PSUs and capital goods to FMCG if the Nifty drops below 20,000 (18x FY25 PER)," stated Emkay.
Since the risk associated with India has increased, it anticipates a short-term market derating. The most susceptible industries are capital goods and PSUs, which investors are recommended to avoid for the time being. However, when spending does rebound, value and fast-fashion shops stand to gain a lot. The brokerage is beneficial to healthcare as well.
Tuesday, June 4, saw the worst session for Indian markets in more than four years, marking a sharp turnaround that erased Monday's gains. Polling indications suggesting a closer race than expected for the current Narendra Modi-led NDA government were the main cause of this decline. The S&P BSE Sensex closed at 72,079, down 4,389.7 points, or 5.74 percent. In a same vein, the NSE Nifty 50 finished at 21,884.5, down 1,379.4 points, or 5.93 percent.
The Nifty fell by 1,982.45 points, or 8.52 percent, to touch 21,281.4 during intraday trade, while the Sensex fell by 6,234.35 points, or 8.15 percent, to reach 70,234.4. Since March 23, 2020, these numbers indicate the largest intraday decline in the previous four years.
Unfavorable Outcomes
The majority of the ruling NDA is expected to be less than it was in 2019, contrary to exit poll predictions of a significantly larger majority. According to current trends, the NDA is expected to secure between 290 and 300 seats, comfortably surpassing the 272 majority threshold. The more unexpected finding is that the BJP alone is predicted to receive between 230 and 240 seats, well short of the majority needed.
Modi returned with updated equations: The brokerage went on to say that although Narendra Modi would serve a third term as prime minister, he will face altered conditions. First, the BJP will change its policies in response to its reliance on regional partners like Telugu Desam and Janata Dal (United). Secondly, there is going to be increased desire from the BJP and its partners to boost economic consumption. If some of the BJP's current allies defect, there is a remote chance that the opposition may take power. That would be doubtful, though, it stated.
Economic Trajectory Unlikely to Change
According to Emkay, the underlying foundations of India's economic momentum are unlikely to shift, even with a smaller majority. The necessity of manufacturing in creating jobs means that this concentration will not waver. The brokerage thinks there could be a slight return to stimulation from consumption, but not enough to be noticeable. State budget deficits might become worse, but there isn't much of a chance that the central fiscal deficit will consolidate.
As the government shifts its focus to capital expenditures, the capex cycle may also slow down, and companies might adopt a cautious approach for a few quarters. Lastly, the brokerage believes that there is minimal chance of a collapse of the twin deficits or bank/corporate balance sheets, and that the extraordinary macro-financial stability will continue.
Reforms at Risk
Emkay claims that labor, land, and agricultural reforms are no longer possible in a factor market. Risks include asset monetization and privatization, which might short-term delay government capital expenditures. It further stated that some political changes, such as synchronizing elections - which need significant constitutional amendment - are currently improbable.
DISCLAIMER: The views and recommendations made above are those of individual analysts or broking companies, and not of Finance Outlook India. We advise investors to check with certified experts before making any investment decisions.
