As the outcome of the Indian Lok Sabha elections nears, global brokerage CLSA has identified 54 “Modi stocks”, mostly state-owned enterprises (PSUs), as “direct beneficiaries of the policies of the current government” led by Prime Minister Narendra Modi.
According to the brokerage, these stocks are rallying in anticipation of the BJP government returning to power following the results of the Lok Sabha elections on June 4, 2024. The list includes a large number of PSUs in capital expenditure and infrastructure-related sectors. Going forward, CLSA predicts that share prices of India’s state-owned enterprises (PSUs) may peak in June or July ahead of the budget announcement by the new government, mirroring the trend seen in previous general elections.
Further, the global brokerage highlighted that 90% of “Modi stocks” have experienced election-focused rallies over the past six months, outperforming the Nifty index. These stocks have averaged over 50% gains, beating the Nifty’s 14% gain.
CLSA identified these 54 stocks from a pool of 183 stocks that make up 30% of the futures and options market. Only five stocks underperformed their benchmarks during the period, it added.
The rise in election-related expectations began in December following the ruling party’s strong performance in state elections, and CLSA expects this trend is likely to continue, especially if the incumbent government returns with a large majority.
“The impressive outperformance of Modi stocks clearly indicates that expectations of a favourable electoral outcome for the ruling party are priced into market expectations,” CLSA said.
However, the global brokerage warned that this rally, driven by narrow election-themed optimism, is expected to slow by mid-2024. A few weeks after the election, CLSA expects investors to be confronted with the reality that many positives may already have been priced into these stocks.
“This may prompt profit-taking by less patient holders of Modi shares,” it predicted.
CLSA pointed to a pattern observed after two previous elections, in 2014 and 2019, when shares in state-owned companies peaked a few weeks after the June election results.
CLSA expects this “election-themed” rally to end in June or July, but sees banking stocks as offering the best risk/reward mix in India in the second half of 2024.
“US banks have performed well so far this year thanks to a clear bounce back against rate cut expectations, but Indian private sector banks have lagged,” CLSA said.
Indian stock markets are expected to remain volatile between the Lok Sabha election exit polls on June 1 and the announcement of the results on June 4.
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The ‘Modi stocks’ listed by global brokerages include well-known companies such as Larsen & Toubro (L&T), NTPC, NHPC, Power Finance Corporation (PFC), Oil and Natural Gas Corporation (ONGC), Indraprastha Gas Limited (IGL), Mahanagar Gas, Bharti Airtel, Indus Towers and Reliance Industries (RIL).
Besides these stocks, banks such as HDFC Bank, ICICI Bank, Axis Bank and IndusInd Bank also have growth potential and could see their share prices rise, CLSA said.
Other stocks picked by CLSA are Ashok Leyland, UltraTech, Bajaj Finance, Max Financials, Zomato and Avenue Supermarts.
Disclaimer: The views and recommendations expressed above are those of the individual analysts or brokerage firms and not those of Mint. We recommend checking with a qualified professional before making any investment decisions.
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