Whether or not Narendra Modi returns as Prime Minister, the election results are bad news for stock market investors. The ruling BJP is far from getting a simple majority on its own, and forming a government depends on NDA partners. Brokerages warn that the stock market might face a downturn, and popular Modi-linked stocks could suffer.
Global brokerage firm UBS stated, “This was not the election outcome the market expected. India’s stock values were high because of assumed political stability with a strong government. Now, those assumptions are in question.” They suggest reducing investments in India within emerging markets.
Emkay Global predicts that India will likely face higher risk perceptions, advising investors to switch from PSUs and capital goods to FMCG stocks. “We expect a short-term market drop due to increased risk. PSUs and capital goods are the most vulnerable, so we recommend avoiding them for now. FMCG and value retailers should make a strong return, and we’re also positive on Healthcare,” said Seshadri Sen from Emkay Global.
After a 6% drop, Nifty is trading at a PE ratio of 19.5x. “Currently, we’re neutral and would stay invested but not add more. If Nifty drops another 10% below 20,000, the market will be attractively valued at 18x PE, providing a good entry point for Indian equities,” Sen added.
Although the BJP is the largest party in the Lok Sabha, analysts expect Modi to return as Prime Minister but rely on regional allies like Telugu Desam and Janata Dal (Secular), leading to policy adjustments.
The government might need to focus on mass market consumption issues, as seen in company earnings data. While infrastructure and capex spending could continue, there may be a need for populist measures. Key government schemes like manufacturing incentives could persist, but expanding these incentives might be difficult. Reforms like agri/food subsidies, land reforms, and direct tax reforms might be delayed.
If capex spending slows and shifts towards revenue expenditure, companies might adopt a wait-and-see approach for a few quarters. UBS analysts believe that despite these challenges, the overall economic stability will remain strong, with little risk to bank and corporate balance sheets.
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