NDA govt, pro-growth budget offer brief relief, but downturn risk looms: HDFC Securities  

Limited upside in Nifty valuations, with mid and small-cap indices trading at premium, keeping the broader market under pressure. Monitoring retail flows crucial for long-term market health

HDFC Securities in its latest report said the ongoing correction due to high valuations in domestic cyclicals and potential market instability post-election. NDA government formation and a pro-growth budget may ease concerns briefly, but any letdown could trigger a significant downturn.

The brokerage house sees low margin of safety in benchmark valuations post-liquidity-driven rally. Election results triggered correction, but no major earnings downgrade expected. PE multiples might contract due to political uncertainty.

Limited upside in Nifty valuations, with mid and small-cap indices trading at premium, keeping the broader market under pressure. Monitoring retail flows crucial for long-term market health, it said.

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It advised caution and recommended bottom-up stock picking to navigate volatility. The brokerage express positivity towards financials for their favorable risk-reward ratio, emphasizing reasonable valuations. Consumer staples, IT, and pharma sectors are also deemed reasonably valued for their earnings quality and growth potential. Conversely, industrials and select PSUs are expected to experience multiple contractions.

On June 4 despite exit poll predictions, BJP failed to secure a clear majority in the 2024 General Elections, surprising markets negatively. This marks a return to coalition politics after a decade, causing frontline indices to drop by 5-8 percent.

While most index returns in CY24 remain positive after a strong CY23, domestic cyclicals experienced sharper corrections, particularly in industrial, PSU, power, and real estate sectors. Defensive sectors like IT, pharmaceuticals, and staples fared relatively better amid risk-off sentiment.

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