Markets optimistic but ‘mistakenly euphoric’, says Kotak Institutional Equities

Mumbai: Kotak Institutional Equities said the Indian market continues to be a mix of being “rightfully optimistic and mistakenly euphoric“. The brokerage said parts of the market rightfully reflect the strength of the Indian economy and its long-term growth prospects, while the other parts reflect “extreme euphoria linked to baseless narratives.”

Kotak said the market continues to be a ‘three-part market’ with sectors such as financials trading at reasonable valuations, sectors such as consumer, IT services and pharmaceuticals trading at full-to-rich valuations and sectors such as automobiles, capital goods and PSUs trading at euphoric valuations.

“Investors are perhaps emboldened by solid long-term growth prospects of India and spectacular developments over the next few weeks, once the new government presents its economic agenda for the next five years,” said Kotak’s analysts including Sanjeev Prasad in a client note.

The brokerage said if BJP gets at least 325 seats and NDA 375, the market is likely to view this outcome ‘quite favorably’.

If BJP gets at least 300 seats and NDA 350 seats, Kotak said the market may be ‘slightly disappointed’ by the outcome.”The market is likely to recover from its initial disappointment after a few weeks with the focus gradually shifting to the strong fundamentals of the Indian economy and its attractive long-term growth prospects,” said the firm’s analysts.If BJP’s count in the voting is around 250 seats and NDA around 300 seats, the market could be ‘significantly disappointed’ with this outcome, according to Kotak.”We would not rule out a meaningful correction in many of the ‘narrative’ stocks in the investment sector (capital goods, defense, electricity, EMS, railways, renewables) and PSUs,” said the analysts. “However, we expect the major indices to likely hold up reasonably well (a moderate correction, at worst), as the market will likely understand eventually that not much will change for several sectors such as banks, consumers, IT services, pharmaceuticals, etc.”

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