General Elections 2024: Haitong expects to see strong pickup in market post polls; prefers these sectors

Elections are a significant catalyst for stock markets. The world’s biggest general election will be held from April 19, 2024, to June 1, 2024, and Prime Minister Narendra Modi’s BJP is widely expected to remain in power.

Chinese securities firm Haitong, in a recent note, observed that Modi remains popular amongst the vast majority of Indians, and the opposition alliance hasn’t proven to be a credible threat, rife with infighting and defections.

Indian markets have been trading near record high levels already factoring in a Modi win in the upcoming elections. Apart from that, continued foreign investor inflows, strong macro data, hopes of a rate cut in the second half of the year, and positive macro trends have also aided the sentiment.

Read here: An upmove seems more likely than a correction ahead of polls, says Shauryam Gupta of Rupeezy

Haitong noted that with markets at all-time highs, the run-up to the elections this year has been relatively muted. It would expect a dip in markets in the months post elections in line with what we have seen in most election cycles after 1999. However, the securities firm believes inflation is being well managed, and the expected rate cuts, coupled with a likely yet unprecedented third term of this popular government should provide a sustainable boost to markets after that.

"We remain convinced of the strength in India markets in the long term and expect to see a strong pickup post-elections. We would recommend looking at any dips as buying opportunities, as valuations are currently at all-time highs. Our preferred sectors are Banks, Industrials and Autos," it said.

Moreover, Haitong expects interest rates to come down in the second half of the year, on account of the government’s focus on managing inflation. Core inflation has been steadily tracking downward, while food inflation still remains a wild card. However, with the likelihood of improved monsoon rains this year, it sees this coming down, bringing headline inflation to within the RBI’s comfort zone for rate cuts. It also expects a strong Capex upswing from private companies which should adequately complement government spending.

Read here: Expert view: Expect moderate gains in 6-12 months; General Election key trigger

Election and markets

With data available over the last five elections, the securities firm noted that markets typically remain flattish over the actual period of the election, with the months immediately following witnessing a drop as the valuations typically build in the outcome of the elections in the run-up to the actual election.

The exceptions were:

1) In 2009, as Indian markets were on an upswing post-GFC coupled with confidence in PM Manmohan Singh’s government at that time, and 2) in 2014, with PM Modi’s BJP-led NDA sweeping into power with a strong business and reform agenda that gave the markets their impetus.

Haitong pointed out that in 2019, the BJP remained in power as expected, though with a much stronger showing than predicted. Markets remained elevated post the elections, but then quickly dropped to pre-election levels before soaring once again.

Read here: Elections 2024 sector picks: IT, Auto among top 5 picks for this season

Key sector performance during election cycles

Haitong noted that banks track the Nifty, which is not too much of a surprise considering the weightage of banks in the index. In 2019, it witnessed that infrastructure and manufacturing diverged a bit from the index, with infrastructure soaring past the index on account of the corporate tax cut announced on September 20, that year.

For manufacturing, this time around though, the government’s focus on self-reliance in manufacturing has been reaping dividends, as seen from the manufacturing index which has been steadily tracking upwards since the government announced the PLI scheme in March 2020. More initiatives such as the EV import tax cut contingent on domestic capex and manufacturing commitments indicate that the government is indeed placing a strong focus on this area, stated the report. The focus to improve manufacturing to 25 percent of GDP, is backed by a strong push by the government, it added.

Read here: Investing before polls can be strategically advantageous, says Franklin Templeton

However, it highlighted that this year, there will not be anything in the nature of 2019’s corporate tax cut to provide such a boost to markets, but, consensus widely expects interest rates to come down in the latter half of the year post-elections. While the RBI continues to maintain its withdrawal of accommodation stance, it believes this could change towards the second half of the year with improved monsoons and rural consumption rising to catch up with urban.

"We can see that such a situation would mirror the post-2019 election year, where interest rates were on a continuous decline after months of successive rate pauses, this will be a welcome move for the markets and we expect Private capex to rise on the back of this," said the report.

Furthermore, a likelihood of improved monsoon rainfall this year as the El Nino weather phenomenon draws to a close. This should provide a boost to rural markets and improve performance in FMCG and auto segments, it added.

Read here: Bharti Airtel set to ride its best financial performance phase in over a decade, says Antique; sees over 22% upside

Valuations

With the index constantly breaching all-time highs, valuations remain stretched, though, on a 1-year fwd PE basis, the Nifty 50 is trading at a slight discount (21.3x) to its 5-year average of 21.7x and the 3-year average of 21.9x, as per Haitong.

"Comparing individual sectors on a 1-year fwd basis, we can see that multiples have rerated significantly post-COVID across all sectors and indices. We have earlier highlighted our preference for Industrials, Banks, and Autos, and we can see that despite high multiples in these sectors, we can also expect relatively strong PAT growth over the next three years. Banks and Autos are currently trading at a slight discount to their 3 and 5-year averages. For industrials we also believe the relatively higher valuations are on account of 1)strong order growth over the last few years which has provided good revenue visibility and 2) the street baking in the expected private capex uptick if the current government were to remain in power and the likely rate cuts if inflation remains within control," it explained.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.