Ab ki baar NDA Sarkar? Analysts turn 'defensive' on India after LS polls

Stock market strategy: Financials, analysts said, offer the best risk-reward. Consumer staples, IT, and pharma also look reasonably valued for their quality of earnings and growth

Market strategy post Lok Sabha elections 2024: Most analysts have turned 'defensive' on India, at least for now, as a fractured mandate in the 2024 Lok Sabha elections has raised doubts over a stable government and policy continuity.

While the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) is likely to form the new government, policy uncertainty may rise, decision-making or further reform push could slow, and policy priorities might shift in the near-term, they said.

"We turn defensive on the markets after the adverse results in the general elections, with the BJP missing an absolute majority. Our Nifty target is cut to 22,000 for June 2024, implying zero returns over the next one year, as we anticipate a derating given the heightened uncertainty," said analysts at Emkay Global.

Further, while analysts don't expect any significant earnings downgrade due to the election outcome, as India has historically been able to grow real GDP by 6-8 per cent under coalition governments, it could lead to a contraction in PE multiples, given the high PE premium enjoyed so far by Indian markets due to political stability and continuity.

Analysts at UBS maintained their 'underweight' rating India, and think implementation of tougher reforms including land reforms, infrastructure spending, divestment, farm bills, Uniform Civil Code, One Nation One Elections amongst others will be challenging.

On Tuesday, the BJP-led NDA won 292 of the 543 Lok Sabha seats, with the BJP alone cornering 240 seats. The Congress-led INDIA bloc bagged 232, with Indian National Congress' share at 99 seats.

On their part, the equity market wiped off Rs 31 trillion of investor wealth on Tuesday. The Nifty 50 closed at 21,885 — its lowest level since March 20 — reflecting a drop of 1,379 points or 6 per cent. The Sensex, after bottoming out at 70,234, closed at 72,079, marking a decline of 4,390 points or 5.7 per cent.

Time to 'shuffle portfolios'

Considering that the NDA forms the government, analysts believe it will pursue a balanced economic growth model, giving equal emphasis on investment and consumption growth.

This would, however, be in contrast to the government's earlier stance, which was primarily focused on infrastructure development.

As an investment strategy, they bet on 'defensive' plays such as pharmaceuticals and consumption, as 'narrative' plays exhibit unattractive risk-reward.

"The fractured mandate makes us wonder if the new BJP government will take this voter feedback and dilute its unequivocal supply side policy-making style to also accommodate the rural and agri push," said analysts at CLSA in their recent note.

They have replaced capex-linked stock L&T with HCL Tech in their India portfolio.

"ITC remains our preferred staples name. Besides, we are, now, clearly overweight on banks, commodities, and IT along with insurance and staples. We limit our exposure in 'Modi stocks' to ONGC and Reliance Industries," they added.

"The new coalition may be less decisive than the outgoing one, and the spending push could shift towards rural (versus capex earlier) in the near-term. We maintain our defensive bias, preferring consumption over capex owing to weak demand weighing on private capex; general government capex decelerating; and elevated valuations of cyclicals," said analysts at Nuvama Institutional Equities.

Financials, analysts said, offer the best risk-reward. Consumer staples, IT, and pharma also look reasonably valued for their quality of earnings and growth.

All eyes on Budget

Going ahead, the next trigger for the markets will be the new government's Union Budget, its policy choices to support growth vis-à-vis ensuring macro stability, and the reform narrative.

Most analysts expect the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias. The higher-than-expected RBI dividend transfer to the government, they said, would create fiscal leeway to increase populist spending to support consumption.

Capex, consumption, rural-recovery, real estate, cement/industrials themes should be on investors' radar going ahead, analysts suggested.