Traders shun Modi’s moves, go on the defensive

Investors in India are shunning stocks that are expected to benefit from Prime Minister Narendra Modi’s re-election and are instead investing in defensive sectors.
Index of the so-called Modi’s Actionsa term invented by CLASSrose just 2% as the prime minister completed his first 100 days in office after winning a third term in early June. By contrast, consumer and software shares rose 20% and 34%, respectively.
Several recent policy changes have underscored the uncertainty investors face after a decade of certainty, as Modi increasingly relies on coalition partners. That has raised concerns about stocks linked to government policy may continue to lag behind the broader market.
“There is a clear 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 was supported by recent volatility in global markets and the election outcome, she said.
The government last month withdrew a policy aimed at hiring market experts for government jobs and deferred a bill on broadcasting services. Modi’s party has also announced cash payments in some states ahead of regional elections this year.
The administration is “becoming populist at the margin,” Mahesh Nandurkar, a strategist at Jefferies Financial Group Inc., wrote in a note. Nandurkar said he expects the government may miss its capital spending target, a significant headwind for sectors like infrastructure that have benefited from strong investment in recent years.
To be sure, Modi’s stock remains on track to outperform the country’s major stock indices for a fourth straight year. The index of such stocks is up 24% in the first five months of 2024 as the prime minister prioritized building infrastructure capacity while focusing on boosting efficiency at the country’s state-owned enterprises.
Despite this, investors remain skeptical about stocks linked to government policy.
Domestic mutual funds, which have been a key driver of local equities this year, have reduced their holdings in capital goods companies in each of the three months since the election results were announced on June 4, according to a note from Motilal Oswal Financial Services Ltd.
Foreign funds also became net sellers in August in sectors such as utilities, cement, metals and financials, according to a Bloomberg Intelligence analysis.
“Unreasonable expectations” on Modi’s stock are now being curbed, said Sreeram Ramdas of Green Portfolio Pvt. Its weak performance could continue till the end of the year, he added.