The recent election results in India, contrary to expectations from exit polls, have shaken market dynamics, causing an increase in volatility and a possible change in risk perception. Here's a breakdown of Citi Research's analysis and initial thoughts on the implications:
1. Valuation Volatility: Disparity between exit polls and actual results can cause short-term fluctuations in valuation multiples. Indian markets, which are currently trading at a significant premium compared to historical levels and emerging market indices, could see adjustments as risk perception evolves.
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2. Strategic disinvestment: Market outlook on strategic disinvestment is expected to become more cautious, pending greater clarity in the upcoming budget. Specific divestment targets may see their probabilities reduced in the short term.
3. Focus on employment and rural consumption: Anticipating a possible emphasis on job creation and rural consumption in the Budget, investors may turn their attention to rural-focused sectors. Consumer and auto stocks like HUL, Dabur (NS:), M&M, Maruti (NS:) and Hero could benefit in the near term.
4. Public Sector Undertakings (PSUs): While the NIFTY PSE index witnessed a post-election sell-off, selective opportunities remain attractive. Names like NTPC (NS:), GAIL (NS:), and Bharat Electronics (NS:), backed by favorable medium-term growth drivers, are viewed favorably despite near-term volatility.
5. Infrastructure and Capex: Expectations for growth in infrastructure and capital spending may undergo a reassessment, which could affect valuation multiples in the short term. However, the government's prioritization of these sectors, coupled with expectations for sustained capital spending, bodes well for the long-term outlook.
6. Pressure from mid-caps: With an increase in risk perception, mid-cap stocks, particularly those that have outperformed large-cap stocks in recent years, could face pressure.
7. Tax Policy Outlook: Investors may perceive lower likelihood of capital gains tax increases in the current scenario, which will influence market sentiment accordingly.
8. Energy sector: The possibility of including gas in the 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 Preference: Citi Research maintains a positive stance on private sector banks over their public sector counterparts within the financial sector.
10. IT Services Caution: While the defensive nature of IT services may offer short-term benefits, Citi Research remains cautious about the sector's long-term business prospects.
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Read more: Goldman Sachs (NYSE:) Report: Economic Impacts of a Possible Coalition Government
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