As investors await the official outcome of India's elections, market strategists are already charting a course for investors post the anticipated political verdict. Exit polls point to a significant victory for the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA), sparking a short-term rally in the markets, particularly if the final results align closely with these predictions.
Elara Capital, a brokerage firm, anticipates that traders and foreign institutional investors (FIIs), who had scaled back their positions in the lead-up to the elections, will now adopt a bullish stance, driving market momentum in the coming week. Despite this optimism, FIIs remain largely neutral to underweight across sectors, with exceptions in financials and consumer staples.
Looking beyond the immediate election euphoria, market analysts at Elara Capital are urging investors to exercise caution and adopt a selective approach to navigate the evolving landscape. While India's markets delivered stellar performance in FY24, boasting a 36% earnings growth in the BSE200 universe, expectations for FY25 must be tempered. The impending moderation in earnings growth, coupled with global macroeconomic factors, necessitates a nuanced investment strategy.
Exercise caution
Looking beyond the immediate election euphoria, market analysts are urging investors to exercise caution and adopt a selective approach to navigate the evolving landscape. While India's markets delivered stellar performance in FY24, boasting a 36% earnings growth in the BSE200 universe, expectations for FY25 must be tempered. The impending moderation in earnings growth, coupled with global macroeconomic factors, necessitates a nuanced investment strategy.
"India’s markets are trading at a premium to all Emerging Market (EM) peers, especially heavyweights, such as China & South Korea, and to its historical past. Forward earnings do not justify these valuations, especially in sectors that
are linked to government policy actions, such as defense, railways, and power. Earnings need to catch up so that after the initial celebration of the election results, markets can potentially see profit-booking. Further upside in repeat names looks unlikely, as fundamentals are not in sync with the stock price," said Dr Bino Pathiparampil, analyst at Elara Capital.
Key Sectors to watch
Real Estate: Despite recent challenges, the real estate sector presents attractive valuation and growth prospects, particularly for companies like Prestige and Godrej Properties.
Banks: Large private banks emerge as frontrunners, poised for steady earnings growth and potential valuation re-rating. ICICI Bank and Axis Bank are identified as top picks due to their robust return on equity (ROE) profile and optimistic prospects for private sector capex.
Automobiles: Maruti Suzuki, Mahindra & Mahindra, Bajaj Auto, and TVS Motors stand out in the automotive sector, benefiting from the revival in consumer demand and favorable policy environment.
Metals and Mining: Global trends favoring metals and mining stocks, driven by a surge in demand amid industrial revival efforts in China and supply constraints, offer lucrative opportunities for investors.
Consumer Staples: Companies like Godrej Consumer Products, Marico, and Mrs. Bectors are well-positioned to capitalize on rural and agriculture-related growth, particularly with the anticipated transition to La Niña.
Caution in Mid and Small-Cap Stocks
Despite the recent surge in mid and small-cap stocks, caution is advised due to stretched valuations. Analysts warn of a potential correction post-elections, urging investors to prioritize fundamental strength over short-term momentum.
"We remain positive on Mid & Smallcap spaces due to benefits from government-led capex, but high valuations suggest a selective approach post-elections. Favorable conditions like the RBI’s dividend payment and likely reduced borrowing suggest lower market rates, benefiting Real Estate, Banks, and Autos. Global trends support metals and data centers, while La Niña should boost rural and agriculture sectors," said Garima Kapoor of Elara Capital.
Financial Sector Resilience
In the financial sector, large private banks emerge as frontrunners, poised for steady earnings growth and potential valuation re-rating. With a robust return on equity (ROE) profile and optimistic prospects for private sector capex, banks like ICICI Bank and Axis Bank are identified as top picks.
"Relative underperformance of banks provides valuation comfort which is corroborated by our “What’s in Price” model. With private capex at the cusp of revival, we prefer private over public banks," said Aditya Jaiswal of Elara Capital.
Why selective?
Rich valuations: Because the prices of stocks are very high compared to what they are really worth, Elara Capital is being careful and selective in choosing which stocks to invest in.
They been optimistic about investing in mid and small-sized companies because these companies have been benefiting directly from government spending on various projects.
The NSE Midcap 100 Index has gained 64% since beginning of 2023 vs 27% gains in the Nifty: This has led to the Index trading at 28.1x 12-month forward P/E, which is at a 71% premium to its long-term average and 30% to its upper Standard Deviation band. This implies that the midcap index is currently trading at a much higher P/E ratio compared to its usual average, which suggests that it's overpriced.
Because mid and small-sized companies are currently overpriced compared to their actual worth, they believe that after the elections, the prices will come back down to a more reasonable level, and they will be more careful in choosing which companies to invest in.
Global economic factors and India's positioning
As India navigates through political transitions and global economic shifts, strategic investment decisions will be pivotal in capturing long-term value in the market. Amid evolving global themes such as the AI boom and infrastructure investments, India's growth trajectory remains promising, albeit with the need for prudent risk management and sectoral diversification.
While the election results may dictate short-term market movements, investors are advised to adopt a discerning approach, focusing on sectors with sustainable growth drivers and robust fundamentals.