Nine Of Ten 'Modi Stocks' Outperform Nifty During Poll Rally, CLSA Says
'Modi stocks' refer to the ones that are direct beneficiaries of various policies adopted by the Narendra Modi-led government, it said.
In the six-month election-focussed rally, 90% of 'Modi stocks' outperformed the benchmark index, compared to 42% of the other companies, CLSA said in a note on Wednesday.
'Modi stocks' refer to the ones that are direct beneficiaries of various policies adopted by the Narendra Modi-led government, it said. "These are capex and infrastructure-linked sectors, PSUs or stocks of some corporate houses."
Larsen & Toubro Ltd., NTPC Ltd., NHPC Ltd., Power Finance Corp., Oil and Natural Gas Corp., Indraprastha Gas Ltd., Mahanagar Gas Ltd., Bharti Airtel Ltd., Indus Towers Ltd., and Reliance Industries Ltd. are CLSA's preferred stocks in this category.
The brokerage identified 54 out of 183 stocks as 'Modi stocks', which account for 30% of the futures and options universe. Only five of these stocks have underperformed the benchmark over the last six months.
"Against the 14% rise in the Nifty, the average up-move for 'Modi stocks' has been 50% over the past six months," CLSA said.
In CLSA's view, election-related expectations started to build up in December, when the ruling party received strong state election results.
'Modi stocks' are expected to continue the rally the most in case the market celebrates a strong election result for the ruling party on June 4, or vice versa.
However, these short-term gains will end in June or July, and the brokerage predicts that bank stocks will continue to offer the best risk-reward ratio in India's growth story in the second half of 2024.
Hence, investors will be confronted with reality within a few weeks after the election results, as less patient investors in these stocks will take profit, it said.
"Something similar happened following the last two elections, when PSU stocks topped out a few weeks after the election results in the month of June. We expect this in June or July, before the budget in July," CLSA said.
Key Takeaways
The 'Modi stocks' have, on average, rallied by 50% in the past six months, compared to the Nifty's 14% rise, CLSA said in a note on Wednesday.
Despite coming from varied sectors, all of the 27 PSU stocks from the F&O space have beaten the Nifty over the last six months, the brokerage said.
CLSA reported that all 27 non-PSU 'Modi stocks', with the exception of five cement companies, have outperformed the Nifty over this period.
The outperformance of 'Modi stocks' indicates that the market has high expectations for a favorable election outcome for the ruling party.
A favourable outcome would raise investors' confidence in India's economic growth. This could potentially motivate investors to invest in India's economic growth beyond the direct policy plays of 'Modi stocks'.
Preffered 'Buy' stocks in the category:
ONGC, NTPC, NHPC, State Bank of India, Power Finance Corp., Indraprastha Gas and Mahanagar Gas in the PSU space.
Ashok Leyland, UltraTech Cement, Larsen & Toubro Ltd. in non-PSU space.
Bharti Airtel, Indus Towers, and Reliance Industries in high-tariff linked space.
Other preferred stocks
HDFC Bank Ltd., ICICI Bank Ltd. Axis Bank Ltd., and IndusInd Bank Ltd., Bajaj Finance Ltd., Max Financial Services Ltd., Zomato Ltd., and Avenue Supermarts Ltd.
