Elections done, Markets Look for Policy Action

28 May 2019

With the political event-uncertainty behind us, markets now look for policy action to spur domestic consumption and encourage private investment activity, both undergoing a period of slowdown (see note).

2019 General Elections concluded with the BJP securing over 300 Lok Sabha seats on its own – strongest single-party tally since 1984. Citi analysts expect NDA to attain a majority in the Rajya Sabha as well, by Nov 2020.

Budget for FY20 (end June/early July) would provide greater clarity on the policy roadmap, however Citi analysts expect the fiscal outlook to remain challenging with limited headspace, despite the BJP’s intent to stick to fiscal prudence.

Citi analysts expect policy continuity from the re-elected government in the following areas:

  • Promoting existing welfare schemes around rural housing, healthcare, electricity, banking, cooking gas, etc.
  • Further increases in Minimum Support Price (MSP) and expansion of the cash-transfer schemes to revive rural consumption.
  • Focus on infrastructure development (roads, railways, airports, renewables, etc.), GST simplification, strengthening the IBC process and initiatives like “Make in India”, “Start-up India” and “Skill India”.
  • Continued coordination with the RBI to ease system liquidity and help the ailing shadow-banking system, consolidation of PSU Banks, channelize credit to the MSME sector to propel investment activity and job creation.

Historically, mid-caps have done well in election years and tend to bounce back following a year of negative returns (mid-caps corrected by ~13.5% in 2018). Additionally, rural focused stocks also tend to outperform post-elections, as noted over the last three general elections.

Source: Bloomberg, Citi Research

While NDA’s victory should help retain the recent FII/FDI momentum, moderating domestic growth and global headwinds (rising oil prices, US-China trade dispute) persist. Nifty FY19 earnings estimate saw a 15 percentage-point downgrade since the start of the fiscal year. Citi analysts consider FY20 earnings growth estimate of 21.6% YoY to be on the optimistic side, as recovery remains contingent upon decline in credit costs and pick-up in consumer demand. Resolutions under IBC remain slow, while recent corporate rating downgrades give cause for concern. With Nifty close to 18x 1yr forward P/E (1.5 sd over mean), Citi analysts see limited upside over current market levels.

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