The 2024 election results may finally compel investors to prioritise numbers over narratives, said Kotak Institutional Equities in a strategy report. The brokerage said that valuations of most sector remain expensive and advised investors to avoid 'narrative' stocks.
Classifying capital goods, electric utilities, and PSUs as narrative stocks, Kotak highlighted their unrealistic volume and profitability assumptions.
"We find the risk-reward unfavorable for these companies, notwithstanding the sharp decline in stock prices on election day."
On June 4, the BJP-led NDA coalition narrowly won the 2024 national elections with 292 out of 543 seats in the Lok Sabha. This performance was weaker than both exit poll estimates and the 2019 results. Following the lower-than-expected results, the Indian equity market experienced its largest single-day fall since 2022, with both Nifty 50 and Sensex dropping nearly 6 percent.
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The NDA's performance was hit in North and West India, although gains were made in East and South India. The BJP won 240 seats, down from 303 in 2019.
Kotak anticipates the BJP will form the next government and continue its investment-led economic agenda while adjusting priorities to support consumption and employment. "We will get a better sense of the same over the next few weeks and in the FY25 final budget," Kotak said.
The brokerage expects the government to maintain its focus on affordable healthcare, housing, energy transition, infrastructure development, and manufacturing. "The government has already executed the bulk of the required reforms for incentivising private investments and execution will be more material."
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Kotak's portfolio is heavily weighted towards high-quality stocks in banks, diversified financials and insurance, consumer staples and discretionary sectors, pharmaceuticals and healthcare services. The brokerage has gradually eliminated capital goods stocks and PSU banks over recent months, citing an unfavorable reward-risk balance after their sharp rally over the past 12-15 months.
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