The results of the recent Indian elections, contrary to exit poll expectations, have intensified market dynamics, causing a spike in volatility and a potential shift in risk perception. Here’s a look at the Citi Research analysis and initial thoughts on the implications:
1. Instability of estimates. Discrepancies between exit polls and actual results could lead to short-term fluctuations in valuation multiples. Indian markets, which are currently trading at a significant premium compared to historical levels and emerging market indices, may see corrections as risk perception evolves.
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2. Strategic disinvestment. Market views on strategic disinvestment are expected to become more cautious pending further clarity in the upcoming Budget. The likelihood of specific sale targets may decrease in the near future.
3. Focus on jobs and rural consumption. Anticipating a potential focus on job creation and rural consumption in the budget, investors may turn their attention to rural sectors. Consumer and auto stocks like HUL, Dabur (NS:), M&M, Maruti (NS:) and Hero could benefit in the short term.
4. Public Sector Undertakings (PSU): While the NIFTY PSE index has witnessed a post-election sell-off, select opportunities remain attractive. Type names NTPC (NS:), GAIL (NS:) and Bharat Electronics (NS:), supported by favorable medium-term growth drivers, are viewed positively despite near-term volatility.
5. Infrastructure and capital expenditures. Expectations regarding infrastructure growth and capital expenditures may be subject to re-estimation, potentially impacting valuation multiples in the near term. However, the government’s prioritization of these sectors, coupled with expectations of sustained capex, bodes well for the long-term outlook.
6. Pressure from mid-cap companies. As risk perceptions increase, mid-cap stocks, especially those that have outperformed large-caps in recent years, may face pressure.
7. Prospects for tax policy. Investors may feel there is less chance of a capital gains tax hike in the current scenario, which will impact market sentiment accordingly.
8. Energy sector: The possibility of bringing gas under the ambit of Goods and Services Tax (GST) could benefit the gas value chain. Companies like GAIL and City Gas Distribution (CGD) will benefit from this potential development.
9. Financial Sector Preferences: Citi Research maintains a positive stance on private sector banks relative to their public sector peers in the financial sector.
10. IT services. Caution: While the defensive nature of IT services may bring short-term benefits, Citi Research remains cautious about the sector’s long-term business prospects.
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