Indian equity benchmarks Nifty 50 and BSE Sensex have gained more than 6% since the state elections.
Sopa pictures | Light rocket | Getty Images
Both the Nifty and Sensex hit record highs of 22,081.95 and 73,000 respectively during the Asian trading session on Monday afternoon.
The country is expected to hold its parliamentary elections between April and May.
“The BJP’s victory is already priced in at this point. Ahead of the state elections, there were a lot of question marks surrounding the party's victory, but a lot of that has disappeared,” said Peeyush Mittal, portfolio manager at Matthews Asia.
Stock markets have priced in “a lot of positives” and investors could only get a single-digit return of 3-5% before the election begins, Mittal told CNBC in a phone interview.
In the last five general elections, Indian markets have risen an average of 18% six months before, 8% three months before that, 2% in the months after the results and 10% six months later, said Shantanu Bhargava, managing director and head of listed investments at Waterfield Advisors.
“If you compare it to the historical average, a lot of the returns are already priced in … and the current government's victory is already priced in the market,” he said, adding that markets are “priced in to perfection.”
So when might investors see another big rally in Indian markets?
Analysts expect this will only happen once the Reserve Bank of India cuts interest rates, which is likely to happen in the second half of the year.
“If [the RBI] “We believe inflation will fall sustainably, then we could see some action in the second half of this calendar year, but it also completely depends on the trajectory of consumer price inflation in India,” said Bhargava of Waterfield Advisors.
Inflation in the South Asian country was 5.5% in November and a Portal poll expects it to be 5.7% in December – still above the central bank's target of 4%.
“A 'harder rally' could occur if the narrative around interest rates becomes 'friendlier' and there are rate cuts by the US Federal Reserve and RBI,” Mittal pointed out.
Confidence in the economy will also boost investment in the country.
India's largest automaker Maruti Suzuki said on Wednesday it would invest $4.2 billion to build a second factory in the country. Vietnamese electric car maker VinFast said earlier this week it would spend around $2 billion to set up a factory in India too.
The southern Indian state of Tamil Nadu has confirmed that Apple suppliers such as Tata Electronics and Pegatron plan to invest more than $4.4 billion in the state as the iPhone maker looks to diversify the supply chain away from China.
Andrew Holland, CEO of Avendus Capital Alternate Strategies, told CNBC's “Street Signs Asia” last week that he expects $100 billion in inflows into India this year, particularly as the country enters the Government Bond Index- JP Morgan's Emerging Markets Index is scheduled to be included in June.
According to India's National Investment Promotion and Facilitation Agency, the country received $71 billion in foreign direct investment in the last fiscal year ended March 2023.
However, India still has a lot to do in its infrastructure to show the world that it can cope with all the interests that come its way.
“The poverty experienced right at the airport in Bombay or Delhi prevents people from betting with high conviction,” said Praveen Jagwani, CEO of UTI International.
Analysts who spoke to CNBC agreed that Indian markets are currently overvalued, but there are still promising sectors.
“There is a huge financialization of savings in the country, moving away from physical assets towards more financial assets,” said Mittal of Matthew Asia.
While “market sectors” are fully valued, financials and consumer staples are still undervalued sectors that will do well this year, said Ramiz Chelat, portfolio manager at Vontobel Asset Management.
“Financials could potentially do well because they are relatively cheap, generate good growth and lag the broader rally,” Chelat told CNBC in a Zoom interview. “And as you see consumption pick up in rural markets, consumer stocks that have lagged a bit could also recover.”
A branch of HDFC Bank in Mumbai, India, on Friday, April 14, 2023.
Bloomberg | Bloomberg | Getty Images
Among financial companies, Chelat favors HDFC Bank as its merger with India's largest mortgage lender, Housing Development Finance Corporation, has increased the lender's mortgage penetration. “It is the cheapest offer in several years,” he adds.
In the consumer space, Chelat said Eicher Motors is a name that “continues to exceed expectations” as it is well positioned in both domestic and export markets.
“They have recorded very good growth during the festive season, indicating that competition in the premium two-wheeler segment has increased.”