The recent election results in India, contrary to poll expectations, have sparked market dynamics, leading to increased volatility and a potential shift in risk perception. Below is a breakdown of Citi Research's analysis and initial reflections on the implications:
1. Rating Volatility: Variability between polls and actual results may lead to short-term fluctuations in rating multiples. Indian markets, which are currently trading at a significant premium to historical levels and emerging market indices, could see adjustments as risk perception evolves.
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2. Strategic divestment: The market view on strategic divestment is expected to become more cautious, pending further clarity in the upcoming budget. Specific divestment targets may see reduced prospects in the near term.
3. Focus on jobs and rural consumption: Anticipating the likely focus on job creation and rural consumption in the Budget, investors may shift their attention to rural-focused sectors. Consumer stocks and auto stocks like HUL, Dabur (NS:), M&M, Maruti (NS:) and Hero could benefit in the short term.
4. Public Sector Undertakings (PSUs): While the NIFTY PSE saw heavy selling after the elections, selective opportunities remain attractive. Names like NTPC (NS:), GAIL (NS:), and Bharat Electronics (NS:), supported by favorable medium-term growth drivers, is viewed favorably despite near-term volatility.
5. Infrastructure and Capital Expenditures: Forecasts for growth in infrastructure and capital expenditures may be subject to re-evaluation, which may impact valuation multiples in the short term. However, the government's prioritization of these sectors, coupled with expectations for continued capital expenditure, bodes well for the long-term prospects.
6. Mid-cap pressure: As risk perception increases, mid-cap stocks, especially those that have outperformed large-cap stocks in recent years, may face pressure.
7. Tax Policy Expectations: Investors may see less likelihood of capital gains tax hike in the current scenario, impacting market sentiment accordingly.
8. Energy sector: The possibility of bringing gas under the Goods and Services Tax (GST) umbrella 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 towards private sector banks compared to their public sector counterparts within the financial sector.
10. IT Services Warning: While the defensive nature of IT services may provide short-term benefits, Citi Research remains cautious about the sector's long-term business prospects.
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