CLSA reshuffles India portfolio post election results; limits exposure in ‘Modi stocks’ to only 2

Global brokerage firm CLSA has revised its India portfolio in response to the Lok Sabha election results. The firm, which recently listed 54 stocks as “Modi stocks,” has now limited its exposure to this category to only ONGC and Reliance Industries, as these have re-rated by less than 15% in the last six months.

In a recent note, the global brokerage firm stated that Indian equity markets, driven by “Modi stocks”, had approached the national elections with strong confidence in the continuity of a robust BJP government.

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The election verdict, with the BJP lacking a simple majority, challenges this conviction and raises concerns about the stability of the government and its policy-making approaches.

Adopting a more defensive stance, CLSA has replaced L&T with HCL Tech in its India focus portfolio. L&T, which has been in the CLSA portfolio since its inception in January 2021 and has outperformed by an impressive 106.2 percentage points, has been replaced. ITC remains the brokerage’s preferred name in the staples sector.

CLSA expresses concerns about potential de-rating in the expensive discretionary and capex space and prefers the valuation support found in private banks.

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The brokerage cautioned about the expensive valuations, noting that even after the sharp drop in Monday’s session, the Nifty 50 (Nifty) remains at 19x, above its 18-year historical average PE, positioned at the 85th percentile, and well over one standard deviation above the average.

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This valuation also positions India as one of the most expensive markets globally, with its premium to Asia, Ex-Japan and EM peers exceeding one standard deviation above the historical average.

Additionally, the 1.8 percentage point discount of Nifty’s earnings yield to the 10-year bond yield is at the 76th percentile, indicating stretched equity valuations compared to bonds, it said.

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Confidence in a stable government and predictable policies has significantly reduced expectations of INR depreciation. This stability has allowed Indian bond yields to trade at the lowest premium to US yields in two decades, CLSA noted.

Furthermore, it said that the premium of mid- and smallcaps compared to the Nifty 50 is also near record highs. These data points suggest that Indian markets approached this event with strong conviction, making them vulnerable to a pullback given the less certain political outcome, the brokerage added.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.