The verdict is a big and positive surprise for the market, in our view, and could herald a strong and stable government, UBS said in India markets strategy report here.
"We remain bullish on Indian equities as markets may continue to trade above fair value. Markets have moved up sharply over the past few months, but is still trading at 15.2x one-year forward PE, very close to its 5-year mean.
"We have talked about Nifty fair value of 6900 based on 15x PE and 15 per cent earnings growth expectation in FY15 and Nifty touching 7,800 at 15 per cent earnings growth for FY15. We believe investors will be willing to give a premium for growth hope and also look beyond FY15 earnings estimates," the report said.
By end of 2014, investors would start looking at FY16 estimates. Based on our top-down expectation of 15 per cent earnings growth in FY16, and 15x PE, we set our Nifty target for end-2014 at 8000, UBS said.
There may be upside to this target based on how policy-making evolves over next few months, which could flow through to earnings estimates and multiples higher than average. On the other hand, a big part of the index does not benefit from the possible economic recovery in IT and pharma or less in staples and global commodities.
"We think sector rotation towards domestic cyclicals should be a strategy investors should continue to pursue, as positioning also remains supportive," it said.
UBS said it remained bullish on India and it may be early to book profits.
"The last time a single party won a majority was in 1984 when the Congress won 414 seats. Even in 1991, Congress had won 232 seats. This does have implications for political economy as coalition politics had arguably led to populism at the cost of sensible policy-making. Various state governments which most ruled by non-BJP parties still play a big role," the report said.
"We believe the reason investors were hopeful of a Modi-led BJP win was his track record in Gujarat as well as his political campaign focused around development rather than populism. With a strong mandate, we believe India's growth story will remain strong, at least in the next few months," it said.
The path to strong long-term economic growth implies some pain in the interim, especially given the fiscal consolidation imperative and inflation moderation target.
UBS said key would be the policy outline over next few months. Given that Modi has won a strong mandate on a campaign focused around driving higher growth, markets will likely continue to believe that the policy outline will be positive, it said.