Jefferies Surprised by Strong Indian Market After Election, Warns Midcaps at Risk

After the general election, India’s Nifty index initially dropped by 5.9% on June 4, but ended the last quarter up 9.7%. This reaction followed the BJP’s unexpected failure to secure a majority.

Jefferies, a brokerage firm, notes that coalition governments can be messy, raising doubts about Prime Minister Narendra Modi’s effectiveness. They warn of potential market corrections, especially in mid-cap stocks, which are currently overvalued compared to the Nifty index.

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Jefferies predicts that investors might favor consumption-focused stocks over investment-focused ones, anticipating the new government will prioritize populist measures. The upcoming budget might reveal more, with potential tax cuts and spending boosts.

Despite possible shifts, Jefferies remains optimistic about India’s ongoing property and capital spending growth. They draw parallels to the 2004 BJP defeat, where initial market drops were followed by significant gains.

Retail investor inflows have surged, driving the market pre-election. However, foreign investors have recently been net sellers. Jefferies believes that any major market correction could attract foreign investment.

On a macro level, Jefferies forecasts 16% annual earnings growth for FY24-26. They note a slight decline in banking sector margins but believe this is already reflected in recent stock performances. The Reserve Bank of India has the flexibility to cut rates if needed, but is currently waiting on the Federal Reserve’s actions.