After the Bharatiya Janata Party (BJP) failed to secure a majority on its own in the Lok Sabha elections, brokerage houses have tweaked their India portfolio on fears of de-rating in the expensive discretionary and capex space.
The election outcome raised doubts over a stable government and policy-making styles as the conviction with which market participants had approached the national elections makes them vulnerable to a pullback, CLSA said in a note.
“Turning more defensive, we replace L&T with HCL Tech in CLSA’s India focus portfolio. We are now clearly overweight banks, commodities and IT along with insurance and staples,” the global brokerage house said.
These doubts openly question the notable premium of Indian equities versus history, compared to bonds, the near record premium of small and mid cap stocks and the recent re-rating of “Modi stocks,” CLSA said.
“Our exposure to ‘Modi stocks’ is limited to ONGC and Reliance as these have rerated by less than 15% in the last six months. We fear de-rating in the expensive discretionary and capex space and prefer the valuation support in private banks,” the global brokerage house said.
Emkay Global also expects Indian equities to be derated in the short-term, as the risk premium on India has gone up after the election verdict. Public sector stocks and capital goods counters, which were expected to benefit significantly from the BJP government’s return to power, are the most vulnerable and should be stayed away from, the brokerage said.
The brokerage doesn’t see the recent correction as “deep enough” and remains neutral on the Indian market. “If the Nifty does correct another 10% to below 20,000 points, we see the market being attractively valued…see an entry opportunity back into Indian equities,” Emkay Global said.
Along similar lines, Jitendra Gohil, Chief Investment Strategist at Kotak Alternate Asset Managers said he expects further correction in the equity market, particularly in the PSU and defence space, along with a rotation towards defensives. He expects pharmaceuticals, FMCG, technology, and private banks to outperform in the near term.
On the contrary, Bernstein believes that continuity of power is a powerful enough narrative to support the economy and that the medium-term growth story in India does not change.
“We also think that while some focus on subsidies at the expense of capex is likely, we do not see a material impact in the near term. From a very short-term perspective, we see the market sell-down as a bit extreme, leaving room for a modest rebound,” Bernstein said in a note.
The brokerage firm has also retained its Nifty 50 target at 23500 points, but sees volatility as a feature of the uncertain policy path, less room for upward revisions, and somewhat rich valuations.