The hope rally saw the benchmark indices – Standard & Poor’s (S&P) BSE Sensex and the CNX Nifty – rally 34 per cent and 36 per cent respectively, from their 52-week low in August 2013. The indices are up over 20 per cent since their February 2014 lows.

In the process, the markets touched new highs, with the Sensex and the Nifty crossing the 25,000 and 7,500 levels, respectively, on intra-day, with the outcome of the general elections giving a clear mandate to the Narendra Modi-led Bharatiya Janata Party to form the next government at the Centre.

Foreign institutional investors have been the key drivers, having pumped nearly $15 billion into the Indian markets, making these one of the best performers among emerging markets, especially poll-bound ones.

While the up-move has been swift, the markets’ wishes in terms of poll outcome have also come true.

Where are the markets headed
Experts suggest the election results were far ahead of all exit poll expectations, and with strong chances of an improvement in overall economic indicators, the market could scale higher levels. Over the next few weeks, the focus will be on news flow from the new government with respect to policy initiatives, which will impact overall market sentiment.

Abhay Laijawala, managing director and head of research, Deutsche Equities India, says the Sensex can hit 28,000 by December, implying a multiple of 18 times on FY15 earnings per share.

Nomura Research has a target of 27,200 for the Sensex by December-end.

Ravi Sundar Muthukrishnan, senior vice-president and co-head (research) at ICICI Securities, says the Nifty will hit 8,100 by year-end, based on a forward price-earnings ratio of 16.7 times. However, he cautions that rising food prices because of El Niño effects, sticky core inflation, slow industrial growth and actual performance of the government falling below expectations are downside risks.

“On the administrative front, there should be scope to move things forward a bit faster. Stepping up efforts to roll out infrastructure investment projects are likely to provide a lift to the investment cycle, although we are not likely to see visible signs of that before we enter into the second half of the current financial year,” says Leif Eskesen, chief economist for India and HSBC.

Where to invest
The recent rally has seen investors’ preference shift to high-beta and policy reform-driven sectors like capital goods, banking, power, infrastructure and oil and gas. On the other hand, classic defensive plays such as fast moving consumer goods (FMCG), health care and information technology (IT) gained the least during this period.

Motilal Oswal, chairman and managing director, Motilal Oswal Financial Services, says this is the best time to invest in equities for the medium to long term. And, suggests that a portfolio mix of growth and cyclical stocks would yield far bigger returns than debt or any other asset class.

Among individual stocks, BF Utilities, TVS Motor, CEAT, KEC International, NCC, Adani Enterprises, HCC, HDIL, IRB Infrastructure, YES Bank and HPCL have surged 100-500 per cent.

“We are at the cusp of a structural bull market. While the Budget will emerge as the next key milestone for the market, investors should begin to assess what the next government is likely to do. With the economic turnaround and revival of manufacturing taking centre-stage, we recommend investors to intensify focus on domestic cyclicals and policy improvement plays,” Laijawala says.

His picks from the large-cap universe include Axis Bank, Bank of Baroda, Punjab National Bank, REC, L&T, Siemens, UltraTech, Power Grid, RIL, Bharat Petroleum Corporation (BPCL), Tata Steel, Maruti Suzuki, TCS and Titan. We also expect mid-caps to continue rally as a high beta play on economic improvement. Among the mid-caps, he likes Apollo Tyres, CESC, Hindustan Petroleum Corporation, Jain Irrigation, LIC Housing Finance and Shree Cement, he adds.

Muthukrishnan of ICICI Securities recommends Reliance Industries, ONGC, Larsen & Toubro, Axis Bank, Punjab National Bank, IDFC, Coal India, UltraTech Cement, Tata Motors, Maruti Suzuki, Power Grid and Oberoi Realty.

Manishi Raychaudhuri, Asian equity strategist, the head of research- India of BNP Paribas, says political euphoria tends to lift policy-related expectations. “We upgrade recommendations and target prices for several stocks, majority of which are from banks, industrials, energy, property and consumer discretionary,” he says.

However, everything is not rosy. “We remain cautious on public sector banks, and infrastructure and property companies with stretched balance sheets.” We are also bearish on materials, particularly on ferrous and non-ferrous metals, suffering from a supply glut in Asia,” he adds.

Although IT services companies (Infosys, Tech Mahindra), Tata Motors and ITC could underperform in the near term, Raychaudhuri thinks these companies deserve space in any Indian portfolio in a long-term perspective.