>MARKET STRATEGY (CLSA)

A bullish mandate

The 2009 general election has thrown in a big positive surprise, with the Congress-led UPA coalition positioned to achieve a majority with little external support. With big gains for the Congress party and marginalisation of smaller regional parties, the new government will be well positioned to pursue a stronger reform agenda. With political risk less of an issue, we see the market – still under owned by FIIs – being rerated. Banks, infrastructure plays will be stronger beneficiaries.


Strong mandate for UPA – a big positive surprise
■ Congress-led UPA wins 263/543 seats – 50 ahead of the most optimistic exit polls.

■ We see the UPA bridging the nine seat gap to the half-way mark rather easily, as smaller regional parties and independents will vie to join the winning coalition.

■ The Congress made big gains in the states of Uttar Pradesh, Andhra Pradesh, Kerala and Maharashtra. The Left parties got just 24 seats, versus 59 in 2004.

■ Dr Manmohan Singh will be the Prime Minister once again. The Congress’ strong
show in UP, however, sets the stage for Rahul Gandhi’s ascent as the next leader.


Strong coalition augurs well for governance
■ The biggest positive of the elections was vote for stability, reflected in the defeat of opportunistic regional parties. The Congress and the BJP together won 321 seats.

■ With the strong mandate for the Congress-led UPA alliance and the party’s own tally of 206 seats, bargaining power of smaller partners has eroded significantly.


Reduced political risk will reflect in re-rating of equities
■ The political risk factor was holding back FII investments - reflected in FII ownership of the market remaining c.20% below the MSCI benchmark.

■ While radical reform looks unlikely, we are optimistic about higher FDI limits for insurance and retailing and quicker resolution of project specific bottlenecks.

■ Sensex P/B remains 35% below the historical average. While a 50bps fall in risk premium suggests 25% re-rating, ROAE below mean will limit it to 10-15%.

■ While FY10 EPS outlook remains geared to global recovery, we see market rerating supporting a 12mth target of 14,000 for the Sensex.

■ Signals of fiscal consolidation will be key to sustainability of the rally.


Winners and losers
■ The immediate rally will be broad-based, with focus on large cap, index majors.

■ Banks and infrastructure plays will be top beneficiaries of improvement in capital market, corporate confidence. ICICI, HDFC also gain from insurance reform.

■ ICICI Bank, HDFC, Reliance Ind., Reliance Comm. and Sterlite are our preferred picks. We have cut weight for consumers, software in the model portfolio.


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