Brokerages bullish despite BJP falling short of mandate in LS elections

Analysts expect India's macro stability to remain intact but see a hit to India's premium valuations

Brokerages remain positive on India’s prospects despite the Bharatiya Janata Party (BJP) falling short of a decisive mandate even though some see a hit to India’s valuation premium and near-term consolidation.

Some analysts feel the strong earnings and economic growth trajectory remains intact and investors can look to buy into any election-related weakness as the momentum is set to continue.

A few brokerages, however, have raised concerns over a possible increase in outlay towards social schemes and subsidies.

“The BJP is falling short of a majority but our base case is that the BJP-led National Democratic Alliance (NDA) is likely to form the next government. Our medium-to-long term views do not change,” said a note by Morgan Stanley led by India equity strategist Ridham Desai.

Desai said BJP’s seat loss from 2019 was “largely down to local and non-economic issues” and “the BJP-led NDA government is unlikely to sacrifice macro stability as its anchor to economic policy.”

Morgan Stanley, however, warned that any unresolvable disagreements within the NDA have not been priced in by the equity market.

Another US-based brokerage Goldman Sachs said it remains constructive on domestic equities and any weakness can be an opportunity to accumulate. This is because India’s strong earnings and economic growth stories remain intact.

Strategist Sunil Koul said market returns will be driven by expected earnings growth of 15 per cent in 2024-25.

On Tuesday, the benchmark Nifty tanked as much as 9 per cent before settling 6 per cent lower. This was its worst single-day fall since March 23, 2020.

On Wednesday, the markets recouped over half the losses, surging 3 per cent, amid BJP key allies pledging their support to Prime Minister Narendra Modi’s leadership.

Bernstein, a brokerage, believes the pre-poll alliance, seat-sharing arrangement and consensus on policies could act as a stabilising factor for the new government.

“The setback may, however, be enough to change the focus: push the government to tweak some of its policies and increase spending towards direct social schemes. With capital expenditure (capex) likely to be driven more by the private sector as end markets are changing, the role of the government will moderate over time, limiting material risks to the cycle,” said Venugopal Garre, managing director (MD) & strategist at Bernstein.

The brokerage has kept its Nifty target unchanged at 23,500. HSBC believes the election verdict will trigger consolidation in the market.

“While the outcome should not alter India's long-term attractiveness — and we still think India's overall Goldilocks scenario is intact — in the shorter time-frame it will impact risk tolerance of the market. This will trigger preference for defensiveness,” said Amit Sachdeva, India Equity Strategist, HSBC.

Few brokerages, such as CLSA and IIFL Securities, sound a little less sanguine. “BJP’s own struggle to 240 seats will likely interrupt fiscally and politically challenging reform efforts, cause more populism and potentially impact medium-term growth. This will surely cause multiple compression,” said a note by IIFL Securities.

CLSA said the election results have shifted the mood from “conviction to doubt.”

“PM Modi is seen as a strong leader, who has so far always led a government with simple BJP majority, even during his tenure as Gujarat chief minister. These dynamics could make India watchers question if this coalition setup can coordinate well among itself to provide a stable government,” said CLSA strategist Vikash Kumar Jain. He added that India’s expensive valuations could now come into question.

The brokerage said one needs to see if the new government will “dilute its unequivocal supply side policy-making style to also accommodate the agri push to address this political reality.”