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:
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.
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.