 "Key overhang removed, focus to shift on earnings, liquidity: Brokerages")
Brokerages believe the Bharatiya Janata Party's (BJP’s) stronger-than-expected showing in state elections reduces political risks for the domestic markets going into 2024. However, after the short-term excitement, the focus will soon shift to earnings, global liquidity conditions, and the interest rate trajectory.
“BJP's win in the three state elections is much better than what exit polls suggested and reinforces the consensus expectations of a Modi win in the 2024 national elections with a greater likelihood of 300+ seats for the BJP. This boost to the investor sentiment should augur well for domestic cyclical sectors viz. banks, industrial, power, property, and mid-caps,” said a note by Jefferies.
The Bank Nifty index on Monday soared 3.6 per cent, Nifty Oil & Gas rose 3.2 per cent, and Nifty Realty gained 2 per cent. Nifty IT and Healthcare underperformed with gains of 0.2 per cent and 0.3 per cent, respectively.
"Equity markets were justifiably anxious about the outcome of state polls and what it portends for the 2024 general elections. With the outcome overwhelmingly in favour of the incumbent BJP, the confidence of the market in the current dispensation and political continuity post-2024 Lok Sabha elections will get a boost. This augurs well for macro and policy momentum for India, which, at the moment, is seeing the highest growth among major economies (both GDP as well as corporate earnings),” said a note by Motilal Oswal.
The Indian National Congress (INC), BJP’s main opposition, was expected to give a tough fight in all four state elections. But it managed to win only in the south state of Telangana and was trounced in the north states.
“An Congress sweep of the state elections would have led markets to reassess their probability of the BJP returning to power in the 2024 general elections with a strong majority. It would have strengthened INC’s leadership position within the fractious anti-BJP opposition alliance, I.N.D.I.A. Instead, the INC’s poor performance is likely to make for more differences within the opposition camp,” said a note by Nomura.
I.N.D.I.A—a 28-party opposition alliance led by the Congress—plans to jointly fight the BJP in the General Elections in May 2024.
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Phillip Capital in a note said foreign portfolio investor (FPI) flows into India will get a boost as political risks reduce.
“These will result in retention of robust earnings. Domestic flows and investment in equities have been quite substantial in the last few years. This trend is likely to continue. These developments along with peaking of interest rates globally, bodes well for FPI flows,” it said.
FPI flows this year have ebbed and flowed. After a strong sell-off in September and October, overseas flows have steadied in recent weeks amid a drop in US bond yields and improvement in global investors’ risk appetite.
“These election results are certainly a cut above market expectations. And markets, to that extent, shall cheer the outcome in the near term. That said, eventually, fundamentals—earnings, liquidity, and interest rates—shall have an upper hand in shaping the market outlook over the medium term,” said a note by Nuvama Institutional Equities.
After the latest gain, the Nifty is up nearly 14 per cent on a year-to-date basis. Meanwhile, the Nifty Midcap 100 and the Nifty Smallcap 100 are up nearly 40 per cent and 50 per cent, respectively.
The Nifty currently trades at 25 times its FY23 earnings. Analysts expect Nifty earnings to grow about 20 per cent in FY24. On FY24 estimated earnings, the Nifty still trades at a lofty 21 times.
“We expect election-linked market volatility to remain low, which may result in the market trading at rich valuations in the near term," said a note by Kotak Institutional Equities.
"Mega-caps have underperformed other large-caps, mid-caps, and small-caps. It is possible that mega-caps may now see more interest from the market (specifically foreign investors) given their reasonable valuations and lower worries about a sub-optimal outcome (no decisive mandate) in the general elections," the note added.