As the vote counting proceeded on Tuesday, the Indian stock market took a sharp downturn, with the fall of Sensex and Nifty indices.
The market witnessed intense selling pressure, while the Sensex dropped by 8.15 percent, and the Nifty 50 index dropped by 8.5 percent to 21,281.45 points.
With the market in a state of turmoil, brokerages are now warning of a potential decline in the Indian stock market.
According to global brokerage firm UBS, the recent election outcome has caught the market off guard, as the market valuations were not aligned with the expected outcome.
India’s stock market valuations have historically been expensive, with valuations based on ordinary corporate earnings growth or outlook. The political stability or policy certainty provided by a strong government were key factors supporting these valuations.
CLSA has identified 54 “Modi stocks” that directly benefit from government policies, with RIL, PFC, and ONGC among them. Top buy recommendations within this group include L&T, NTPC, NHPC, PFC, ONGC, Indraprastha Gas, Mahanagar Gas, Reliance Industries, Bharti Airtel, and Indus Towers.
However, with the election outcome now in question, these assumptions may no longer hold true, and in the emerging market context, the brokerage firm UBS has mentioned India as underweight.
UBS analysts also mentioned that if the capex cycle slows down and shifts towards revenue expenditure spending, corporates may adopt a cautious approach, waiting to see how the situation unfolds for a few quarters.
However, the brokerage’s analysts believe that India’s macro-financial stability will persist, with little risk of a collapse in the twin deficits (fiscal and current account), or bank or corporate balance sheets.
Further, Emkay Global, a leading brokerage firm, has warned that India’s stock market is likely to experience a derating due to a higher risk perception.
One of the analysts at the brokerage firm has advised investors to switch their positions from public sector undertakings (PSUs) and capital goods sectors to fast-moving consumer goods (FMCG).
The analyst explained that the risk associated with investing in India has increased, making PSUs and capital goods the most vulnerable sectors, and recommended staying away from these sectors for the time being.
On the other hand, Emkay’s analyst believes that consumption-related sectors, such as FMCG and value retailers, are likely to make a strong comeback. The analyst is also optimistic about the healthcare sector.
At the current market levels, Emkay Global is neutral on the market and advises investors to stay invested but not add to their positions.
However, if the Nifty index corrects by another 10 percent to below 20,000 points, the brokerage’s analyst believes that the market will be attractively valued at 18 times the price-to-earnings (PE) ratio, presenting an opportunity for investors to re-enter the Indian equity market.
Written by Shivani Singh
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