Direct Equities: Coalition, but conviction

Despite an arguably sub-optimal General Elections Outcome (a coalition Government taking office), positive macro narrative for Indian equities remains intact – strong GDP growth, manageable inflation, likely political stability and rising weightage in global benchmark indices. After Counting Day stutter, Election Outcome linked exuberance has seen indices rally in June (Nifty-50/BSE-500 +4%/+5% and Nifty Midcap100/Smallcap100 +7%/+8%) taking valuations well above historical averages (1yr-fwd P/E of Nifty-Midcap100/Nifty-Smallcap100/Nifty-50/BSE-500 are at a premium of 47%/24%/8%/17% to their respective 7-yr avg).

Highlights

• Global equities rebounded strongly in May (MSCI World +4% MoM) and have continued to rally in June (excluding EU markets potentially on account of rising political risk) on the back of cooling-off inflation data (expectations of US Fed rate cuts by 4QCY24 intact) and AI-linked tailwind for tech stocks taking Nasdaq to fresh life highs.
• We expect the market to cool-off in the lead up to Union Budget (mid-July) on anticipation/narrative build-up around populist measures and potential rejig in taxes (hike in capital gains tax incidence).
• Sectors: (1) BFSI is our preferred sector considering reasonable valuations. (2) Selectively favor stocks in logistics, consumption & auto. (3) Rich valuations keep us on the sidelines in case Capital Goods (4) IT stocks may look interesting as multiples moderate.
• The Realty, Durables, Engineering & Healthcare sectors are expected to show the highest YoY earnings growth in FY25.