A landmark third term for the ruling Bharatiya Janata Party (BJP) on June 4 will directly benefit 54 stocks, which include public sector undertakings (PSUs), infrastructure companies and shares of some corporate groups, international brokerage firm CLSA said on Wednesday.
Calling these scrips as “Modi stocks”, the brokerage said 90% of them have outperformed the benchmark Nifty 50 index in the past six months in anticipation of a BJP-win in Lok Sabha elections.
Out of these 54 stocks, CLSA’s preferred picks include Larsen & Toubro, NTPC, NHPC, Power Finance Corp, Oil and Natural Gas Corp, State Bank of India, Reliance Industries, Bharti Airtel, Mahanagar Gas, Ultratech Cement, and Ashok Leyland.
“The last six months have seen a clear basket trade…. In our opinion, election-linked expectations build-up started about six months ago with a strong state election result for the ruling party in early-December,” CLSA said.
The sentiments were buoyed late last year when BJP did exceedingly well in the state assembly elections in the Hindi Heartland area, fuelling hopes of an easy victory in Lok Sabha polls.
Since these state elections around six months ago, the Nifty 50 has risen 13%, while the average up-move for the stocks perceived to benefit directly from BJP’s victory has been around 50%.
“The dominant outperformance of Modi stocks clearly suggests high expectations of a favourable election verdict for the ruling party being baked-into market expectations,” CLSA said. “A favourable outcome would raise investor confidence in India’s economic growth. This may encourage investors to play this growth beyond Modi stocks, which are direct policy plays.”
While the brokerage said the outperformance of “Modi stocks” may continue in case of a strong election result, it added that there could be profit booking ahead of the Budget in July.
“Notwithstanding this anticipation-fuelled rally, a few weeks after the election, investors will be confronted with a reality check that many of the positives these stocks may have started baking-in will be realised only in a gradual manner. This may drive profit-taking by the less patient holders of Modi stocks,” CLSA said. It highlighted a similar trend seen in the past two General Elections when PSU stocks topped-out a few weeks after the results.
CLSA believes shares of private banks would be better play on Indian economic growth in the second half of 2024 given that they provide better risk-reward opportunities. In the last one year, when the Nifty PSU Bank index has surged a whopping 81%, the Nifty Private Bank index has risen only by 6.4%.
CLSA said that though clear pushback on rate-cut expectations has allowed banks in the US to outperform, Indian private banks have been laggards.