The recent election results in India, contrary to exit poll expectations, have stirred up market dynamics, prompting a surge in volatility and a potential shift in risk perception. Here's a breakdown of Citi Research's analysis and initial reflections on the implications:
1. Valuation Volatility: The disparity between exit polls and actual outcomes may lead to short-term fluctuations in valuation multiples. Indian markets, 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: The market's outlook on strategic disinvestment is expected to become more cautious, awaiting further clarity in the upcoming budget. Specific divestment targets may see reduced probabilities in the near term.
3. Focus on Jobs and Rural Consumption: Anticipating a potential 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:DABU), M&M, Maruti (NS:MRTI), and Hero could benefit in the short term.
4. Public Sector Undertakings (PSUs): While the NIFTY PSE index witnessed a sell-off post-election, selective opportunities remain attractive. Names like NTPC (NS:NTPC), GAIL (NS:GAIL), and Bharat Electronics (NS:BAJE), backed by favorable medium-term growth drivers, are viewed favorably despite near-term volatility.
5. Infrastructure and Capex: Expectations regarding growth in infrastructure and capital expenditure may undergo reassessment, potentially impacting valuation multiples in the short term. However, government prioritization of these sectors, coupled with expectations of sustained capex, bodes well for long-term prospects.
6. Mid-Cap Pressure: With an increase in risk perception, mid-cap stocks, particularly those that have outperformed large caps in recent years, could face pressure.
7. Tax Policy Outlook: Investors may perceive a lower likelihood of capital gains tax increases in the current scenario, influencing market sentiment accordingly.
8. Energy Sector: The possibility of including gas under the Goods and Services Tax (GST) umbrella could benefit the gas value chain. Companies like GAIL and City Gas Distribution (CGD) firms stand to gain from this potential development.
9. Financial Sector Preference: Citi Research maintains a positive stance on private sector banks over 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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