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With the Exit polls for the 2024 Lok Sabha elections suggesting a comfortable majority for the BJP-led NDA, the Indian benchmark equity indices Nifty 50 surged past 23,000 and BSE Sensex crossed the 76,000 mark in opening trade on Monday. Investors are optimistic that Modi's administration will continue to invest in infrastructure and manufacturing to sustain economic growth.
Market experts anticipate that Indian equities will rise over the next three to four days, with the Nifty reaching a new all-time high this week. "We expect the Nifty to reach approximately 23,200-23,300 levels during this period. Additionally, we foresee the India 10-year yield reaching 6.9% and the INR appreciating to 82.75," said Amit Goel, Co-Founder & Chief Global Strategist, Pace 360(SEBI Reg. multi asset PMS & Cat III AIF expert).
What should investors do now?
Goel believes investors can buy the gap up on Monday, June 3rd, as the above scenario unfolds, with particular emphasis on PSEs, and defense and infrastructure companies. In the longer term, we continue to believe that Indian equities represent the biggest bubble in the history of world equity markets. We expect the Nifty to correct down to 18,000 levels by October 2025. Therefore, we recommend that investors book profits when the Nifty climbs above 23,000 and gradually reduce their exposure to Indian equities," said Goel.
Indian market overvalued, little value found across sectors , says Kotak Institutional Equities
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Even brokerage Kotak Securities believes that most stocks and sectors are currently overpriced relative to their intrinsic value. Analysts at Kotak see this overvaluation as more pronounced in smaller, lower quality, and less risky stocks (likely referring to value stocks).Kotak believes the current stock prices likely reflect overly optimistic assumptions about future profitability and sales volume.
Many narrative and PSU stocks trade at high multiples, banking on optimistic volume and profitability assumptions. While a significant BJP victory might prolong high valuations in certain sectors like automobiles, capital goods, and PSUs, Kotak doubts many of these lofty expectations will materialise, Kotak report added.
According to Kotak Institutional Equities' May 31 report, the Indian stock market is a mix of "rightful optimism and mistaken euphoria." Some sectors reflect the strength and long-term growth of the Indian economy, while others show "extreme euphoria based on unfounded narratives."
It categorises the market into three parts: financials at reasonable valuations; consumer, IT services, and pharmaceuticals at full-to-rich valuations; and automobiles, capital goods, and PSUs at euphoric valuations. Kotak's analysts, suggest investors may be encouraged by India's long-term growth prospects and anticipated developments once the new government unveils its economic agenda for the next five years.
"The results of the exit polls should not be a major surprise for the market. We note that (1) stocks with large leverage to the government’s economic agenda (investment, PSUs) have delivered spectacular returns in the past 1, 3, 6 and 12 months and the Indian equity market has seen a modest increase in volatility in the past one month, but India’s VIX is still lower than those seen during previous elections, suggesting less uncertainty regarding the election outcome among market participants," said Sanjeev Prasad of Kotak Institutional Securities.
Government agenda likely to focus on investment-led growth
Kotak expects the ‘new’ government to:
- Continue with its economic agenda of development, growth and liberalization
- Focus on investment-led growth, with the recent large transfer of the RBI surplus enabling it to increase capex versus the interim budget.
It believe that the government will continue its focus on key areas such as affordable healthcare and housing, energy transition, infrastructure development (defense, railways and roads) and manufacturing.
"A large BJP victory may sustain rich-to-bubble multiples in parts of the market (automobiles, capital goods, PSUs) for longer, but we would be surprised if many of the lofty embedded expectations come to fruition," said Prasad.
Implications for the market/economy:
"The victory of PM Modi/BJP augurs well for the economy and capital markets as it provides stability and continuity in policymaking with a single-party majority government, which will be expected to continue pushing its economic agenda. Equity markets displayed some anxiety and nervousness recently around the impending political uncertainty, which resulted in a sharp rise in volatility in Apr and May’24. With this clear verdict, markets will heave a sigh of relief, in our view, and go back to fundamentals/business-as-usual mode," said brokerage Motilal Oswal in a note.
Motilal suggests focusing on certain types of companies when investing. They like financial companies, consumer goods companies, industrial companies, and real estate companies. They've also listed some specific companies they think are good investments.
Their top picks include: Large caps – ICICI Bank, SBI, L&T, Coal India, M&M, Adani Ports, ABB, HPCL, and Hindalco; Midcaps: Indian Hotels, Godrej Properties, Global Health, KEI Industries, PNB Housing, Cello World, and Kirloskar Oil.
Meanwhile, YES Securities, has suggested several stocks worth buying ahead of the Lok Sabha election results on June 4. These stocks include NTPC, Texmaco Rail & Engineering (Texrail), SBI, GMR Airports Infrastructure, and Bharti Airtel, with potential returns of up to 26%.
Brokerage firm Phillip Capital listed 21 stocks that could make investors richer in the next year, and these include SBI, BoB, Canara Bank, PFC, REC, Shriram Finance, Muthoot Finance, UltraTech, Siemens, Hero MotoCorp, TVS Motor, Divi's Labs, Syngene, APL Apollo, Jindal SAW, IGL, Aarti Industries, Vinati Organics, Praj, Gokaldas Export, and SP Apparel.
Brokerage JM Financial believes that “Policy continuity will ensure opportunities in Defence and Cap goods space while valuation comfort is available in Private Banks and Consumers. Unlike the past, large caps will outperform SMIDs in the post election cycle.”
JM Financial's analysis of the Volatility Index (VIX) during past election cycles leads them to believe that the VIX has reached its highest point in this particular election cycle. This suggests that the level of uncertainty and market volatility related to the elections has likely peaked.
The report suggests that while small and mid-cap stocks (SMIDs) have historically outperformed the Nifty during previous elections, JM Financial currently favors large-cap stocks due to their more favorable valuations. Specifically, they find valuation comfort in sectors such as private banks and consumer goods.
With the expectation of policy continuity being the base case scenario, JM Financial anticipates positive market movements following the announcement of election results on June 4th. They advise investors to take advantage of any market dips by buying into stocks.
After the elections, the market's attention is expected to shift towards the Union Budget, which is likely to be presented in July. This suggests that market dynamics will continue to evolve beyond the immediate aftermath of the elections.
