The recent Indian election outcome has surprised many, with Prime Minister Modi's party failing to secure a simple majority. Despite this unexpected turn, our analysis at Jefferies indicates a likelihood of a coalition government led by Mr. Modi. It maintains its stance on the housing-driven capital expenditure (capex) upcycle, but anticipates that the stock market will demand further evidence.
Drawing parallels to the 2004 scenario, Jefferies notes that extreme market reactions could potentially present buying opportunities. Our focus remains on large-cap companies that have lagged, offering attractive risk/reward profiles. Currently, it is overweight on private banks, consumer staples, and automotive original equipment manufacturers (OEMs), while reducing overweight positions on real estate, industrials, and public sector undertakings (PSUs).
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The BJP's setback, losing 63 seats and falling short of a simple majority with 240 seats, primarily stems from significant losses in five major states, notably Uttar Pradesh, Maharashtra, Rajasthan, Karnataka, and West Bengal. On the contrary, the Congress party has made substantial gains, securing 47 additional seats to reach a tally of 99. Additionally, the performance of NDA allies gains significance, with their combined seats inching them towards a slim majority. Notably, the roles of key allies like TDP and JDU will be pivotal, with their historical alliances with the NDA.
Despite the political shake-up, Jefferies anticipates a limited impact on the economy, with GDP growth likely to remain within the 6.5-7.0% range. Government initiatives in infrastructure spending and the ongoing housing boom have propelled corporate expenditure. While near-term risks may result in minor adjustments to earnings growth projections, it foresees continued support for corporate capex. Market dynamics may favor large-cap companies, market laggards, and quality private sector firms.
Drawing from the 2004 scenario, where the market initially dipped post-election results but later rebounded significantly, it anticipates a similar trajectory. As such, Jefferies has adjusted its model portfolio, reducing weightage in recent winners such as PSUs, select industrials, and realty. Conversely, it has increased exposure to rural recovery themes, adding stocks like HUL and M&M as proxies. Additionally, it has included HDFC Bank (NS:HDBK) and adjusted positions to align with potential government policy agnostic plays.
While the election outcome may have caused short-term volatility, strategic portfolio adjustments can position investors to capitalize on emerging opportunities in the evolving market landscape.
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