As Nifty Turns Volatile After Shock Election Results, Brokerages Advise Caution

Markets showed some signs of recovery on Wednesday after a historic fall on Tuesday caused by the unexpected results of the 2024 general elections.

What Happened: After a landslide on Tuesday, the markets opened in the green on Wednesday. At the time of writing the Nifty 50 was up 0.36% to trade at 21,963.35. The gains were led by FMCG majors such as Hindustan Unilever, Tata Consumers and Britannia.

What Are Brokerages Saying? UBS commented on the markets following the Indian elections, noting that the outcome was not what market valuations were set up for. They highlighted that Indian valuations have been high despite modest corporate earnings growth and outlook. The appeal of India’s rich valuations was largely attributed to the political stability and policy certainty provided by a strong government, assumptions which might now be questioned.

UBS stated they remain underweight (UW) on India in an emerging market (EM) context. They also noted that, as of yesterday’s close, Indian equities were at an all-time high premium compared to EM equities and Indian bonds.

Phillip Capital said that their bear-case scenario has played out. The brokerage added that the BJP did not secure a majority, but the NDA will form the government with Narendra Modi as prime minister. They anticipate more clarity on the details of the government formation in the coming days to weeks. Meanwhile, they expect market volatility to persist.

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Bernstein in its note on the Indian markets post-election, asserted that the continuity of power is a strong narrative that will support the economy. They acknowledged a potential shift towards subsidies at the expense of capital expenditure but do not foresee a significant near-term impact. Bernstein maintains its stance on the market, projecting decent economic growth but noting a peak in earnings growth, limited room for upward revisions, and somewhat rich valuations. They expect high single-digit returns and have kept the Nifty target unchanged at 23,500 while anticipating continued volatility due to policy uncertainty.

Equirus Securities said that the NDA won approximately 292 seats, significantly lower than the 340-350+ predicted by exit polls. The BJP’s 240 seats suggest a coalition government, limiting its ability to push aggressive transformational reforms. Equirus advises a return to fundamental investing, focusing on sectors and stocks with clear earnings visibility. The era of paying high multiples for stocks based on expected major reforms is over, the analyst added. They highlighted rural areas as a strong theme due to improving incomes, favourable monsoon forecasts, and anticipated increases in social spending following the election outcome.

Emkay Global said that the election gave a negative surprise of the NDA returning with a reduced majority and the BJP falling short of a majority. The brokerage house anticipates Modi will continue as prime minister but in a less favourable context. The overall economic direction is expected to remain the same, but significant reforms like factor market changes and privatisation are unlikely. Emkay predicts a derating of Indian markets due to increased risk perception and advises shifting investments from PSUs and Capital Goods to FMCG. They recommend buying Indian equities if the Nifty index drops below 20,000.

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