'Not an election that': What UBS says on BJP, stock market, likely impact on reforms under NDA

Foreign brokerage UBS feels June 4's election outcome was something the stock market was unprepared for and that Indian stocks may now underperform going ahead. In a strategy note, it said this was not an election outcome the market valuations were set up for, adding India market valuations have been expensive for pretty ordinary corporate earnings growth outlook. It said one of the arguments behind India's rich valuations was the political stability afforded by a strong government. Some of those assumptions could now come under question, it said.

It remained underweight on India in an emerging market EM context. After a weak political outcome, it expects stock investors to focus on the government formation and choice of prime ministerial candidate considering the BJP does not have a simple majority of its own. It said investors would want to know will it still be Narendra Modi as PM or someone else.

They would also focus on policy choices to support growth vis-à-vis ensuring macro stability, and the reform narrative.

"We would watch out for upcoming Union Budget announcements: Our base case is for the government to stick to a medium-term fiscal consolidation roadmap but with a populist bias. The higher-than-expected RBI dividend transfer to the government would create fiscal leeway to increase populist spending to support consumption for lower income strata (cash transfers, higher rural spending, income tax rationalisation, affordable housing etc)," it said.

UBS said the government may continue its thrust to boost public capex. UBS said the implementation of labour laws into four labour could still take place as these are already cleared by both houses of the parliament.

"Lastly, we think the next set of reforms in land and capital that markets were hoping for will likely disappoint as political capital is lower vis-à-vis 2019 and 2014 elections," it said.