Investors return to Indian equities with consumption sectors in spotlight

Indian investors enthusiastically returned to the market on Wednesday, with defensives such as fast-moving consumer goods (FMCG), automobile and some information technology names continuing to advance. Market experts are confident that themes such as consumption, banking, healthcare and automobile are poised to gain momentum in the days ahead.

While the focus on the existing reforms related to domestic manufacturing, infrastructure development, etc. are likely to continue, there could be an incremental shift of focus to support employment generation and domestic consumption, especially rural consumption, highlighted Milind Muchhala, executive director, Julius Baer India.

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Pace of reforms may ease

Market experts suggest that while a significant change in the Bharatiya Janata Party's (BJP's) governance agenda is unlikely, the pace of reforms might ease. Many anticipate the continued emphasis on manufacturing, particularly due to its role in job creation.

“Despite short-term volatility, in the medium to long term, Indian markets are on a structural growth path, and themes such as consumption, private sector banks, and healthcare are likely to do well, given their comparatively reasonable valuation,” said Swarup Mohanty, vice chairman & CEO, Mirae Asset Investment Managers.

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He believes that there has been consistent infrastructure development in India while the focus on manufacturing is also beginning to yield results. So, on the policy front, Mohanty expects continuity, which will keep India's position as one of the fastest growing economies intact.

On Wednesday, Nifty 50 ended 3.4% or 735.85 points higher at 22,620.35 points and the S&P BSE Sensex closed at 74,382.24 points, up 3.2% or 2,303.19 points.

Bluechips such as HDFC Bank, ICICI Bank, Reliance Industries, M&M, Axis Bank, ITC and Infosys led today’s upsurge. Meanwhile, all sectoral indices ended in the green today with automobile and fast-moving consumer goods stocks extending their gains from Tuesday.

Shift in equations likely

That said, “The outcome can probably put the government on some sort of a backfoot in terms of policy measures, with possible shifts in equations in political alliances,” Muchhala of Julius Baer India said.

The BJP fell far below the majority mark of about 272, clinching 240 seats, a notable drop of 63 seats from its previous tally of 303 seats five years ago.

Investors are apprehensive of the new government's ability to enact tough reforms with coalition partners. While the expected NDA government formation aligns with market expectations, the BJP and NDA's seat tally differed significantly from the exit poll predictions and market anticipations, raising concerns among investors. Consequently, all major sectors, except FMCG, suffered significant losses on Tuesday, with public sector undertakings, energy, and metals taking the hardest hits. 

Despite the widespread sell-off, certain FMCG and auto stocks remained resilient on Tuesday, suggesting investors are seeking refuge in defensive bets in a highly volatile market.

India VIX index, also known as the fear gauge, dropped 29% on Wednesday.

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In the short term, equity flows are expected to be volatile, with attention possibly shifting to large-cap and defensive sectors such as staples. However, flows are likely to stabilize with more clarity over the government’s formation process and its agenda.

Key triggers ahead

In the near term, the distribution of government portfolios, particularly among key NDA allies, will be crucial, pointed out market expert Ajay Bagga. He added that the Union Budget in July and bond inflow levels following the inclusion in the JPM Global Bond indices will also be closely monitored.

Meanwhile, Aashish P. Sommaiyaa, CEO of WhiteOak Capital Asset Management, believes that the narrative will now quickly move on to the budget related expectations and first 100 days plan of the the new government. “In the initial stages it will be investment and capex sectors but later one expects it to spill over to other sectors: top one likely to be banking,” he said.

Meanwhile, a Citi Research report dated 4 June said, “Status quo in the June RBI MPC policy is an even more likely outcome now”. Maintaining its broad macro forecasts, the brokerage stands by its initial rate cut prediction in October. However, it acknowledges the need for a more proactive approach towards fiscal policies moving forward.

The RBI Monetary Policy Committee (MPC) meeting is on 5-7 June with the policy decision to be announced on 7 June.

All said, the market might have a phase of consolidation in the near future, coupled with heightened volatility, particularly in the momentum-driven and high-valuation sectors such as infrastructure, capital goods, railways, and defence, experts believe.

“While there could be some near-term volatility on account of this slightly disappointing election outcome, we do not currently foresee a sharp correction in the market (could be restricted to 5-7% at the headline index level), and in fact we would look at these interim corrections as an opportunity to add to equity positions,” said Muchhala of Julius Baer India.

What the market saw on Tuesday was more of a knee-jerk reaction, according to experts. As speculative trades unwind and clarity on the new government emerges, markets will stabilize while some also noted that a BJP-led coalition isn't necessarily bad.

The BJP-led NDA alliance is a pre-poll alliance, and hence there could be less friction in the government formation exercise, said Gautam Duggad and Deven Mistry of Motilal Oswal Financial Services in a report on 5 June. Following two successive terms of a clear single-party (BJP) majority, the coalition government is making a comeback. “That said, unlike the earlier NDA coalition governments of 1998-2004 which had >15 constituents with the BJP itself at 182 seats, this coalition will have a lesser number of constituents with the anchor BJP at ~240 seats and thus potentially a smoother approach to governance, in our view,” the analysts wrote.

Even so, there is a section of market that believes that the incoming NDA government is unlikely to turn populist and offer freebies in response to the underwhelming election verdict. They believe that BJP's key values of capex-led nation-building, inflation management, and a strong currency are unlikely to change, and going gung ho on consumption solely on the basis of election results is not justified. But, BJP's focus on rural areas which was already included in their agenda, could boost rural consumption during the third NDA term.

Prime Minister Narendra Modi and his Council of Ministers resigned on Wednesday, with President Droupadi Murmu accepting the resignation and asking him to continue until the new government assumes office. The speculation is that Modi may be sworn in as the PM for a third consecutive time on 8 June.

According to data highlighted by JP Morgan in a report dated 5 June, “On 3 June, 2024, the first trading session following the exit polls, we witnessed the second-highest one-day buying flows of $0.8 billion from foreigners in 2024. This significant foreign buying drove a 3.6% rally in the Nifty.”

On Tuesday, the Nifty fell about 6%. “If foreign investors re-engage the market post-election, we may see above-average realized volatility, potentially slowing the typical process of implied volatility normalization observed post election.” The foreign brokerage advises investors to consider building long positions to capitalize on a potential Nifty uptrend.