The Exit Polls seem to give a clear advantage to BJP-led NDA faction. JM Financials have done some number crunching on their own. They expect votes to swing in Maharashtra (-8 seats), West Bengal (+4) and Tamil Nadu (+5 seats) and see a net incremental loss of ~4 seats to 299 for BJP in their base case while the bear and bull case seat tally is in a narrow range of 290 to 310, according to them.
The question then is how do all these numbers impact the market. According to JM Financial, “Policy continuity will ensure opportunities in Defence and Cap goods space while valuation comfort is available in Private Banks and Consumers. Unlike the past, large caps will outperform SMIDs in the post election cycle.”
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Markets, as per the JM Financial report, entered the election season with the certainty of continuation of the incumbent government and hence, had already factored in policy continuity. Furthermore, the analysts at JM Financial said that the government’s focused approach on infrastructure development and improvement in macro variables, while being fiscally prudent, has also gained investors interest in the recent years. This has made the market concerned with the likelihood of regime change and its possible impact on macroeconomic equilibrium maintained by the policies of the incumbent government.
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Dips should be bought into with focus on large caps
JM Financial said that based on its analysis of volatility Index (VIX) during past elections, it believes that VIX has peaked in this cycle. “Although SMIDs have outperformed Nifty in the past, we prefer large caps this time due to valuation comfort. On a sectoral level, we find valuation comfort in private banks and consumption space. As policy continuity is in our base case, we expect healthy gains to follow election results on 4th June, and we believe any dips should be bought into,” the report said. After the elections, the markets will shift their focus on to the Union Budget, which is likely to be tabled in July.
