Citi's NDA bet for post polls market: Mid-caps, domestic-focused portfolio

With elections round the corner,Dalal Street is touching new record highs every minute but it seems the market is more bullish on companies whose businesses cater to a foreign market than those looking inwards.

At atime when foreign institutional investors are eyeing a stable government at the Centre, any abrupt surprises might not bode well for India’s equity markets.

[caption id=“attachment_74156” align=“alignleft” width=“380”]  Reuters[/caption]

Brokerage Citi in a report today points out thatforeign ownership of stocks is at its peak but it is concentrated at the top end of the market, implying a large element ofsafety in the build-up to elections. However, sinceelections are unpredictable, it has outlined three different portfolios that investors can profit from the most likely outcomes.

1.NDA/BJP Alliance: The Colt - Ready to Run: This is the market favourite and the most likely outcome, according to opinion polls.

In such a scenario, Citi recommends an aggressive, domestic and mid-caps-focusedportfolio.

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If the BJP forms a majority, Citi is heavily overweight on stocks like Maruti Suzuki, Tata Motors, defensives like HDFC, HDFC Bank, ICICI Bank, capital goods like Larsen & Toubro and Adani Enterprises. Among energy companies it has given the highest weight to Reliance Industries. It is also bullish on Ultratech Cement, ultilites like Tata Power, and software majors, Infosys, TCS and Wipro.

So those who have been hiding in defensives like consumers, pharma or IT can probably shift money away from these sectors into more cyclical sectors like banking, capital goods, auto which are more dependent onreform acceleration.

In other words, high risk-high return.

2.UPA/Congress Alliance: The Stallion - Knows his way around

Citi recommends a defensive, offshore, large- to mid-caps focusedportfolio

In such a scenario Citi is overweight on Maruti, HDFC, HDFC Bank, Axis Bank, RIL, ITC, Tata Steel, Dr Reddy’s, Glenmark and Bharti Airtel

3. Third Front/No Majority- The Stud - Can look after himself
Citi advises investors not not take any risk in such a scenario but rather bet on ultra defensive, Off-shore, large caps-focusedportfolio with stocks like ITC, Infosys, TCS, HDFC, HDFC Bank, Reliance Industries and Sun Pharma.

A coalition of smaller regional parties without a common economic agendawould likely provoke further capital flight and will hit banks, metal and oil & gas stocks the most. In such a scenario, investors are better off with ultra defensive and export-oriented large cap stocks.

According to the brokerage the following stocks are the high-beta election plays:

[caption id=“attachment_78574” align=“aligncenter” width=“600”]  Chart from Citi Research[/caption]