Despite the narrower than expected victory, the markets will still deliver high single-digit returns, wrote analysts at Bernstein, who have retained their end of the year Nifty target at 23,500.
They expect the NDA to form the government but added that in an extreme scenario such as if the opposition wrests the alliance's key allies, their investment approach to India will change "materially".
Also read: What next for Nifty after hammering on election results? Experts advise a shift in portfolio
The analysts have retained overweight on financials but are selective about picks across sectors. They also remain underweight on small and midcaps over large caps.
"We believe that continuity of power is a powerful enough narrative to support the economy. We also think that while some focus on subsidies at the expense of capex is likely, we do not see a material impact in the near term," they wrote in the report titled 'India Strategy: What after the Surprise Verdict?'
Therefore, they have retained their previous stance on the market and expect volatility to remain a key feature "given the uncertainty on policy path".
The analysts still see "decent economic growth but a peaking of earnings growth, less room for upward revisions and somewhat rich valuations".
They are seeing no hurdle on the BJP-led NDA forming the government, given that alliances and seat-sharing arrangements were set pre-poll. They also don't see any policy derailing since the alliance has a consensus on policies. They have pegged the scenario of the opposition taking away NDA's allies as a "low-probability event".
In the new term, the analysts do expect the setback in results to cause the government "to tweak some of its policies and increase spending towards direct social schemes". But they don't see this as very disruptive.
Also read: How have past election results impacted economy, markets? A closer look through graphs
"While capex is likely to be driven more by the private sector as end markets are changing, the role of Government will in any case moderate over time, limiting material risks to the cycle," they elaborated.
They do see a "risk of more focus on subsidies compared to the last five years" but added that this is unlikely to change their view on the fiscal front materially.
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