* Strong government. For the first time in 30 years, a single party gained majority?obviating the need for compromising on economically relevant ministries. Further, the NDA swept large states like Maharashtra, Bihar and Haryana, where it is not in power at the state level: in a year, 50% of India?s population could be in states under NDA rule, helping Centre-state coordination. The near two-thirds majority for the NDA and a weak opposition are also good for legislation, despite the fragmented Rajya Sabha.
*Reform momentum to pick up. Both legislative (e.g., GST) and administrative (e.g., PPP in large industries like railways and defence production) reforms are now likely, and should be a high priority for the new government. We also expect PSU bank recapitalisation, reform of Coal India, and power distribution to be initial focus areas. Agriculture (particularly fruit and vegetables, milk, eggs and meat/fish) will also see attention as only the government can bring food inflation down by raising supply/cutting wastage.
* The hope and expectations rally to continue
The broader Indian market has rallied despite continued EPS cuts and the P/E multiple has increased sharply. This suggests that while the market is aware of the weak earnings drivers in the near term, it is optimistic about a future recovery in fundamentals. Given the strength of the verdict, and the series of announcements now likely to come from the government, this increase in multiples is likely to sustain.
*Boosted by global trends
Such rallies are driven by the flow of news and funds. The news flow has indeed been encouraging, with a potential change in government that is considered very reformist. The global environment for equities has also been supportive. Equity markets globally, and in particular, EM equities, have done well, as have riskier bonds. The US treasury yields, so widely expected to be well above 3% sometime this year, have actually fallen to 2.5% now.
*Market re-rating, though patience will be tested. Some, if not most, of these changes are likely to take three-four years, if not more, particularly as the economy is not the government?s only goal. However, the pace of news flow should keep broader market multiples supported. They are still near ten-year averages, and the fall in US bond yields and EM bond yield spreads should help maintain healthy flows. Buy Reliance Industries, NTPC, Axis, Maruti, BoB, BPCL, Shriram Transport. Sell: Bhel, Tata Steel, BoI.
?Credit Suisse