Modi Stocks: CLSA Strategist Says 'Basket Trade' In PSUs To Have Reality Check Soon

Vikash Jain: See, I think an event like that and with the positioning that it has seen, there is obviously some bit of risk management that is required. I mean, none of us, even some of those clients sitting in the UK could not have predicted Brexit.

Similarly, when it comes to trying to predict such events, you know, consensus among the White crowd, with all its ways in which Parliamentary democracies work, there's always that small inkling of doubt that is there.

So, there's obviously a little bit of risk management which might be seen, something which is being seen going into that event in the last few days. Beyond that, I think the crowd in general is pretty convinced of a continuation of a third term. So it's only a little bit at the margin.

Otherwise, I think everybody is invested in seeing that continuation. So that's clearly a base case that, you know, the ruling party comes back with a reasonably strong majority. That's what the base case is. If there is any deviation from that, it will lead to a much bigger move in the markets on either side.

Vikash Jain: Let's try and understand what that number really means, because I think beyond a point it is about getting a bigger majority in the Rajya Sabha.

I mean, an event which gives you confidence happens, number two, an event that gives you confidence that there will be more states which will kind of come under the fray of the ruling party and that basically means better coordination and better overall growth, like there are certain subjects which are clearly state subjects.

There's only so much that the Centre can do about it. So the market looks at everything, eventually filtering down on whether this improves the outlook on growth, or it deteriorates it.

Now, if 303 was the number, from last time the rally that we've seen, which started in early December, post the positive state elections, slowly the buildup was that things are looking that the government is likely to be as strong and stronger than that. That's why that number around 300 is relevant.

Now, if the number is less than that, then the confidence in that thing about Rajya Sabha and getting more states goes down at the margin. So that is how it could flow into maybe at the margin confidence or growth is a little lesser than where we have been.

So, obviously, the most important number is 270 or I would say that clearly is the important number. But nonetheless, if it's going to be my guess, now a lot of this has to be factored in. You know, things are changing by the day.

It's good that the market is going a little light into that event with the kind of moves that we've seen in the market in the last two or three days. But clearly, 300 I would say, is at the margin. Lower or below 300 will be at the margin disappointment.

The two numbers that you're working with are rounded off at 300 and 270. I would say a number less than 300 is going to be at the margin of disappointment. But if it is above 270, then it should still be digested. So that's how I would look at it.

Vikash Jain: I think so. Good that you define the timeframe. My opinion on stocks will be different depending on the timeframe.

The note I wrote about Modi stocks, essentially that's just a catchy terminology to make things simple. Basically, there are these 54 stocks. Half of them, 27 being PSUs, the other half being non-PSU stocks are linked to certain sectors, certain kinds of characteristics, which are generally associated more closely to policies of the government.

Now, the median return on the stocks is 50% in the last six months. Six months again, because this has been the period of election value and the market has gone up by 15%... There are stocks that have doubled. Now, that just tells you that there is a lot of excitement that has got baked into these. Some of these stocks were cheaper, like some PSU stocks much cheaper. So they have kind of gone up, caught up to that value trade and they've gone beyond that.

So from a more near-term perspective, if you were to ask me 6-9-12 months, of course, these stocks, irrespective of the outcome of the elections, will have to, you know, hold back and catch up on breath. So that's how stock markets work. Nothing goes up, you know, linearly every day. They will have their fits and starts and that's something which one should bear in mind.

A lot of the times when they have built in a lot of these positives at the start, there will be a catch up. Now, when I look at the last two elections in 2014 and 2019, there was this similar kind of a trade and the PSU basket or the PSU index can be seen as an easy proxy to capture this kind of election trade, within a couple of weeks or within a few days after election results.

In both of those instances, PSU stocks, kind of as an index had an interim peak. Early June, I think broadly, was the date because election results came out in mid-May, both of those times. So, you know, from that perspective, I think what's also starting to happen is post-election results, you start seeing the ministers. Then, the discussion moves to the Budget, which typically is about six weeks by five to seven weeks after the election results.

So, essentially, there is bit of a reality check. So from that perspective, there are going to be many of those events that will make people think that these stocks have moved, at least for the time being, a bit ahead of themselves.

That's why what we predict is a playbook similar to the last two times and sometime in this month, a kind of an interim top for these Modi stocks as a basket. Then you start separating out like right now.

Clearly, I mean, it's remarkable 27 PSU stocks in the F&O basket. All of them have outperformed Nifty. These come from various sectors. So there's clearly a basket trade happening irrespective of the sector dynamics, which have kind of really played out.