Indian equities surged over 2 per cent to hit fresh lifetime highs on Monday after the BJP’s decisive win in assembly elections in three states removed a key overhang of political uncertainty for the market.

While state elections have shown no correlation with Lok Sabha elections in the past, the win could bolster investor confidence in Indian equities, given the higher probability of the ruling party retaining power at the Centre after next year’s general elections.

The Sensex rose 1,383 points or 2.05 per cent to 68,865 on Monday, while the 50-share Nifty settled at 20,686, up 419 points. The rally was led by financials, with the Nifty Bank climbing 1600 points to a record high of 46,484 and surpassing the previous high of 46,369 made in July this year. The Sensex has gained 4.4 per cent, or 2,889 points, in the past five sessions of upmove.

Top Nifty gainers on Monday include Eicher Motors (7.4 per cent), Adani Enterprises (7.1 per cent) and Adani Ports (6.1 per cent). ICICI Bank and SBI were the top Nifty Bank stocks, with gains of 4.7 per cent and 4 per cent, respectively. The market capitalisation of the Bajaj Group crossed Rs10 lakh crore in intraday trade, joining the likes of Tata Group, Reliance Industries, HDFC Bank and Adani Group.

Jitendra Gohil, Chief Investment Officer, Kotak Alternate Asset Managers, said: “Investors may extrapolate this resounding victory for the ruling government and assign a higher probability of a stable government at the Centre in the upcoming general election in May. Political stability is crucial for India to attract long-term foreign capital, maintain financial stability and sustain current high valuations.”

Foreign portfolio investors bought shares worth Rs 2,073 crore on Monday, while domestic institutions shopped for equities worth Rs 4,797 crore, provisional data showed.

“With the outcome overwhelmingly in favour of the incumbent BJP, the confidence of the market in the current dispensation and political continuity post 2024 Lok Sabha elections will get a boost. This augurs well for macro and policy momentum for India which, at the moment, is seeing the highest growth among major economies (both GDP as well as corporate earnings),” said a note by Motilal Oswal Financial Services.

This could pave the way for a pre-election rally. The Nifty has given positive returns of 9-36 per cent six months before the results of the general elections on five previous such occasions (1999-2019).

The market is likely to trade at rich valuations in the near term, given the reduced election’ risk’ and growing expectations of an imminent rate cut cycle in the US. According to Kotak Institutional Equities, the mega-caps and financial stocks are reasonably valued compared to their historical valuations and future prospects, and the former may see more interest from the market, particularly the FPIs.

Nifty is now trading at 17.8x FY25E EPS, below its long-period average 20x.

BFSI, industrials, real estate, auto and consumer discretionary remain the preferred sectors for Motilal Oswal Financial Services.

“We continue to remain constructive on Indian equities and believe the market is underestimating India’s GDP growth. We favour domestically focused cyclical and interest rate-sensitive sectors for the next twelve months,” said Gohil.

He expects PSU banks and PSU stocks (power, energy, defence, cap goods, NBFCs) to experience further upside and re-rate further. He is positive on the banking and financial sector, real estate, and cement.

Better than expected GDP growth, solid corporate earnings, supportive global macros with rates peaking out, Brent crude in a benign range of $80 per barrel and stable bond yields are some of the positives for the market.

Global equities traded mixed on Monday, as strong cues from US markets on the prospect of an early interest rate cut by the Federal Reserve were offset by persistent concerns over an economic slowdown in China. Hang Seng slid over 1 per cent, the most among Asian peers.

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