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As India approaches crucial general elections, investors are making their choices clear: they’re betting on cyclical sectors, such as banks, capital goods, materials and real estate.
Stocks from these sectors have gained 10 percent or more over the past month, according to a Macquarie report.
According to the brokerage,Adani Ports, Axis, ICICI, HDFC Bank, Tata Motors, Tata Steel, NMDC, RIL, Maruti and Power Grid are best placed for a re-rating.
The recent surge in Indian equity markets has been widely termed as a hope rally, in anticipation of an economic turnaround post elections, driven by a stable government and a revival in economic reforms.
Most opinion polls indicate the BJP-led NDA gaining ground and market returns have been positive in the run-up to the general election.
In past elections, strong governments were greeted with rallies in the markets, with stocks moving up 20-25 percent, Macquarie said, adding that rallies such as the recent one start two to three months prior to elections as expectations build up. If election results are favourable, then stocks continue to forge ahead. In such a scenario, cyclical sectors outperform defensive stocks.
The report, however, cautioned investors to brace for a possibility of a hung parliament after the elections. “While most opinion polls are pointing to a possible NDA victory in elections, 1996 and 1998 elections remind us of the grim possibility of a hung parliament, when the NDA government lost by just one vote. Markets can move down 10 percent or so post such an event. Stick to quality,” it advised.
The top three average sector outperformers heading into elections on a six month-return basis are energy, utilities and financials while the relative underperformers are consumer staples, healthcare and IT, data by Macquarie Research showed.
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