Brokerages have warned that a derating is in the offing for Dalal Street and that high-flying Modi stocks could face a reality check.
"This was not an election outcome the market valuations were set up for.
India valuations have been expensive for ordinary corporate earnings growth/outlook.
Some of those assumptions could come under question," global brokerage firm UBS said.It said underweight India in the emerging market context.
"We expect a market derating in the short term, as the risk on India has gone up.
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Whether or not Narendra Modi returns as Prime Minister, the election results are negative for stock market investors for sure as the ruling BJP is well short of getting a simple majority on its own and the formation of a government hinges on NDA partners . Brokerages have warned that a derating is in the offing for Dalal Street and that high-flying Modi stocks could face a reality check."This was not an election outcome the market valuations were set up for. India valuations have been expensive for ordinary corporate earnings growth/outlook. One of the arguments behind India's rich valuations could have been the political stability/policy certainty that a strong government gave. Some of those assumptions could come under question," global brokerage firm UBS said.It said underweight India in the emerging market context. Emkay Global said India will likely derate due to higher risk perception and that investors must switch from PSUs and capital goods to FMCG."We expect a market derating in the short term, as the risk on India has gone up. PSUs and Capital goods are the most vulnerable sectors, from which we would stay away for the time being. On the other hand, consumption should come back and we see FMCG and value retailers making a strong return. We are also constructive on Healthcare," said Seshadri Sen of Emkay Global.Following a 6% crash in Nifty , the index is now trading at the PE of 19.5x."At current levels, we are neutral and would stay invested but not add to positions. If Nifty does correct another 10% to below 20,000, we see the market being attractively valued at 18x PE and see an entry opportunity back into Indian equities," Sen said.Given that BJP is emerging as the single largest party in the Lok Sabha, analysts are expecting Modi to be back in power, but will be dependent on regional allies like Telugu Desam and Janata Dal (Secular), and make policy adjustments accordingly."The stress in mass market consumption (as seen through company earnings data) may come into focus for the government. While the overall focus on infrastructure and capex could continue, some fiscal room may need to be made for populist measures. Some of the key flagship schemes of the govt from the market's perspective like PLI (manufacturing incentives) could continue although upsizing incentive dollars could be tough. Reforms that could be placed on cold storage include - Agri/food subsidy reforms, Land reforms, Direct tax reforms," UBS analysts said.If the capex cycle slows down with a pivot towards revenue expenditure spending, corporates may get into a wait-and-watch mode for a few quarters. "We think the unprecedented macro-financial stability will persist, with little risk of a collapse of the twin deficits or bank/corporate balance sheets, it said.Dalal Street's top stock picker Raamdeo Agrawal believes that a bulk of the selling is already priced in."Yesterday it was a seller's market. Today it is a completely buyer's market. So these terms of trade will keep changing. It is very tough to say where exactly it is going to bottom out. Let us have some patience and appetite for some more correction. I would say another 5-10% correction on the downside and then the dialogue will change," he said.
