With the decisive mandate for the BJP in UP and expectations of a further push to reforms, investors could increase their exposure to stocks and benefit from the rally which will unfold going ahead, believe analysts.
Given the election results, most analysts believe it should be easier for the Modi government to push through with further reforms. While GST should happen quickly -- though a large part of the upside on this account has already been factored in the current prices -- given the stability and the improving prospects for the ruling party in 2019, markets can expect longer-term reforms to be initiated.
According to Kapil Gupta and Prateek Parekh of Edelweiss Securities, the strong performance will embolden PM Narendra Modi to continue with his reform process. This, along with improving global growth, should keep markets buoyant. The brokerage maintains its bullish stance with overweight in cyclicals and IT and metals.
Samiran Chakraborty, economist at Citigroup had also pointed out in a recent report that a win will embolden the government to carry on with its anti-corruption agenda and even push for more contentious reforms like labour reforms.
Amar Ambani, Head of Research, IIFL, who expects a 150 point rally on the Nifty on Tuesday, says, "On the reform side, auctioning of 200 mines to raise resources and opening up/raising limit in FDI in some sectors are some moves that are likely." They may give farm loan waiver but in what form and whether directly from Central fund or through PSU Banks remains to be seen, adds Ambani.
The rally going ahead, according to experts, will be a function of both reforms as well as liquidity.
Says Ajay Bodke, CEO & Chief Portfolio Manager-PMS, Prabhudas Lilladher, “Equity markets would be happy with this outcome and scale a new high ably supported by a torrent of domestic liquidity. Though valuations remain expensive, markets would pin its hope on recovery of as-yet tepid corporate earnings over the next few quarters and the passage of GST.”
Global liquidity though would depend on Fed's move this week on US interest rate as well as future commentary on the rate trajectory and economy. Experts though believe that with the US economy on the mend, Indian export-oriented sectors like pharma and software services should also see gains despite the perceived headwinds and challenges. Strength in US economy will also help keep the dollar firm versus Indian rupee, and provide a tailwind to export-oriented sectors.
But, there is a word of caution as well given the elevated valuations and subdued earnings so far.
Naveen Kulkarni of Phillip Capital believes that investors can buy large caps but be wary on the mid caps front as they are on the expensive side. The brokerage is overweight on metals, telecom and banks.
Investors are being advised to focus on companies with better earnings visibility as well as domestic consumption and infra themes.
The BJP's strong performance in UP should also have some direct impact for companies catering to India's largest state by population.
Analysts at Anand Rathi highlight that irrigation projects and Ganga water purification plans would benefit companies such as Praj Industries, Thermax, VA Tech Wabag, ITD Cementation, Kirloskar Brothers as well as engineering, procurement and construction players. Given the agri focus and demand from UP skewed towards more di-ammonium phosphate (DAP) and lower nitrogen, phosphorus, potassium (NPK) usage, north based players in this segment such as Chambal, RCF and Zuari Agro will benefit more than the south based NPK players such as Coromandel International, believe analysts at Motilal Oswal Securities.
Most analysts point that that the key issue now be of execution, and remains a key monitorable. If the government falters on expectations, markets could see a deep correction. Additionally, newsflow around the monsoon will also play on sentiment. Besides, there could be some near-term disruption in business, when GST implementation gathers steam even as the key event will provide a level playing field between organised and unorganised players and push the economy to increased formalisation.
