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Elections 2024: NDA wins, just about

The BJP-led NDA coalition won the 2024 national elections narrowly, with 292 out of 543 seats in the Lok Sabha. The market may have concerns about political stability, but we assume that the BJP/NDA government will form the next government and continue with its economic agenda. We see further reset in expectations and valuations in the ‘narrative’ parts of the market.

NDA won 292 seats, with BJP winning 240 seats in the 543-member Lok Sabha

NDA won 292 seats in the 2024 general elections (versus 353 in 2019), led by the BJP winning 240 seats (versus 303 in 2019)—see Exhibit 1. The NDA’s performance has been significantly weaker than estimates of the exit polls and that of 2019 (see Exhibits 2-3). The weaker-than-expected show of the BJP versus 2019 and versus exit polls reflects weaker-than-expected performance in its strongholds of North and West India, even as it made gains in East and South India and in a few concurrent state elections (see Exhibits 4-6).

Government’s economic agenda may not change much

We expect the ‘new’ government to continue with its investment-led economic agenda, but it may tweak its priorities to support consumption and employment. We will get a better sense of the same over the next few weeks and in the FY2025 final budget. The government may continue with its focus on (1) affordable healthcare and housing, (2) energy transition, (3) infrastructure development and (4) manufacturing (see Exhibits 7-8). The government has already executed the bulk of the required reforms for incentivizing private investments (see Exhibit 9) and execution will be more material.

Risk-reward unfavorable for ‘narrative’ stocks, even after correction

We expect a reset in the market’s hitherto cavalier investment stance toward ‘narrative’ stocks. We have struggled with the implied growth and profitability assumptions embedded in the market cap. of several ‘narrative’ stocks (capital goods, electric utilities and PSUs). We find the risk-reward unfavorable for these companies, notwithstanding the sharp decline in stock prices on election day. Most of these ‘narrative’ stocks have risen sharply over the past 12-15 months (see Exhibits 10-13). They (1) offer a large downside to their fundamental fair values and (2) trade at rich-to-bubble valuations (see Exhibits 14-15). Our reverse-valuation exercises show unrealistic volume and profitability assumptions in most cases. We will revisit them in the next few days.

Back to fundamentals perhaps for the market?

The 2024 election results may finally compel investors (institutional and non-institutional) to focus more on numbers and less on narratives. We would watch for any change in the stance of retail investors, who have been the major force behind the market in terms of flows (see Exhibits 16-20). We prefer sectors with high visibility of compounding in earnings/book available at ‘reasonable’ valuations (see Exhibit 21) and avoid ‘narrative’ stocks. We would note that valuations are still on the higher side for most sectors (see Exhibits 21-31).

Changes to recommended model portfolio—no change for now

We leave our recommended large-cap. portfolio unchanged for now (see Exhibit 32). Our portfolio is very heavily skewed toward high-quality stocks in (1) banks, diversified financials and insurance, (2) consumer staples and discretionary and (3) pharmaceuticals and healthcare services. We had gradually eliminated capital goods stocks and PSU banks over the past few months, noting their unfavorable reward-risk balance after the sharp rally over the past 12-15 months.

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