No stopping the election party with occasional profit-booking say analysts

• Kotak Institutional Equities says that stocks are likely to trade at rich valuations in the near term. The reduced election ‘risk’ and growing expectations of an imminent rate-cut cycle in the US may sustain the Indian market’s rich valuations.
• Japanese investment bank Nomura said that the results of the state elections in India have calmed fears of fiscal populism, but competitive populism is expected to remain a dominant theme for the 2024 general elections.
• Nifty to outperform other major indices over the next year as mega caps have underperformed the broader markets.
  

After sounding caution on the market’s irrational exuberance several times in the last one year, Kotak Institutional Equities has decided not to be a wet blanket. Now Kotak Institutional Securities writes a whole report saying ‘There’s No Stopping This Party’.

The market now has clarity that there is no political risk and continuity of policy is also a given. According to Nomura, BJP’s state election wins should allay market concerns over political risks.

In its Market Outlook report for 2024, Morgan Stanley had predicted some volatility due to political risks, but the BJP’s decisive win in Madhya Pradesh, Chhattisgarh and Rajasthan now indicates that the BJP is set to return to power at the Centre too in 2024. According to Kotak Institutional Equities, the market is likely to trade at rich valuations in the near term. The reduced election ‘risk’ and growing expectations of an imminent rate-cut cycle in the US may sustain the Indian market’s rich valuations.

The domestic research house says that mega-caps have underperformed other large-caps, mid-caps and small-caps but this may change now. KIE expects the net profits of the Nifty-50 Index to grow 18% in FY2024 and 11% in FY2025.

IIFL Securities too says that the results are a positive surprise for markets. Strategists at IIFL say that the outcome of Assembly elections will be a positive surprise for the markets, with most surveys earlier predicting a tougher battle between the BJP and the Congress. “We consider these results positive for GDP growth too. Our Nifty EPS CAGR for FY24-26 is 12%. We expect Nifty to outperform other major indices over the next year. Our top large-cap picks include IndusInd Bank, SBI Life, Sun Pharma, Info Edge and BEL. Our top mid-cap and small-cap picks include Cummins, JB Chemicals, CMS Info and Ashoka Buildcon. Our top sells include Kotak Bank, TechM, Divis, Delhivery, Page and Dr Reddy’s.”

The exuberant mood might stay on, expect analysts, who foresee an across-the-board rally. However, a few believe that the market has already partly discounted a BJP victory with a 500-point rally during the last four sessions.

“But the mood is so exuberant that the rally will continue. A restraining factor will be the valuations which are high and will get stretched further with the rally gaining momentum. In the near-term the market will ignore fundamentals and move up but soon high valuations will trigger some selling," said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.

A few analysts also believe that the mood might stay on until the run-up to the general elections of 2024. “Nifty can see the level of 22,000 in the next four to five months. However, since Nifty has already rallied about 1,700 in the past one-and-a-half months, occasional profit booking cannot be ruled out,” said Sheersham Gupta, director and senior technical analyst at Rupeezy.

‘Calmed the fears of fiscal populism’

Japanese investment bank Nomura said that the results of the state elections in India have calmed fears of fiscal populism, but competitive populism is expected to remain a dominant theme for the 2024 general elections. The report states that while state election results are not always indicative of general election outcomes, investors are likely to view these developments positively, anticipating reduced policy and political risks leading up to 2024.

The report also highlights the BJP's strategy of campaigning under the brand of Prime Minister Narendra Modi, without naming any Chief Ministerial candidate. This approach, which did not yield results in the Karnataka elections, proved successful in the Hindi heartland states. The popularity of state-level leaders, particularly Madhya Pradesh's incumbent Chief Minister Shivraj Singh Chouhan, also played a significant role in the BJP's wins.

Competitive populism has been a dominant theme in state elections, not only for the INC but also for the BJP. Both parties have made populist promises, particularly focusing on schemes supporting women and girls. While investors were initially concerned that a poor showing by the BJP in state elections would increase the risk of more fiscal populism, the actual results have alleviated such fears. However, Nomura suggests that a BJP victory across most states does not necessarily reduce the likelihood of competitive populism recurring as a dominant theme in the 2024 general elections.