Traders shy away from Modi-linked stocks in shift to defensives

Investors in India are shunning stocks that were expected to benefit from Prime Minister Narendra Modi’s re-election, and instead piling into defensive sectors.
An index of the so-called Modi stocks, a term coined by CLSA, has climbed only 2% as the prime minister completed his first 100 days in office after winning a third term in early June. In contrast, consumer and software stocks have rallied 20% and 34%, respectively.

A few recent policy reversals highlight the element of uncertainty that investors must grapple with after a decade of certainty, as Modi increasingly leans on coalition partners. That’s led to concerns stocks tied to government policies may continue to trail the broader market.

There’s “a pronounced shift in focus from infrastructure to agriculture and consumer sectors,” said Sonam Srivastava, founder and fund manager at Wright Research and Capital Pvt. The rotation has been aided by the recent volatility in global markets and the election outcome, she said.

The government last month withdrew a policy aimed at hiring market experts for senior government positions and deferred a bill on broadcasting services. Modi’s party has also announced cash handouts in some states ahead of regional polls later this year.

The administration is “turning populist on the margin,” Mahesh Nandurkar, a strategist at Jefferies Financial Group Inc., wrote in a note. Nandurkar said he expects the government may miss its target on capital spending, a significant headwind for sectors like infrastructure that have been benefited from large investments in recent years.

To be sure, Modi stocks are still on pace to outperform the nation’s main equity indexes for the fourth straight year. An index of such stocks had rallied 24% in the first five months of 2024, as the prime minister prioritized building infrastructure capacity while retaining focus on driving efficiencies at the nation’s state-run companies.That said, investors remain skeptical of stocks tied to government policies.

Domestic mutual funds, the key drivers of local stocks this year, have cut their exposure to companies engaged in manufacturing capital goods in each of the three months since the June 4 election result, according to a note by Motilal Oswal Financial Services Ltd.

Foreign funds have also turned net sellers in sectors like utilities, cement, metals and financials in August, according to a Bloomberg Intelligence analysis.

The “unreasonable expectations” about the Modi stocks are now being scaled back, said Sreeram Ramdas of Green Portfolio Pvt. Their underperformance may continue through the end of the year, he added.