Modi will run a coalition government, how to create portfolios in the changed circumstances

How to make a stock portfolio : The results of the Lok Sabha elections 2024 have come. These results have been somewhat different from 2014 and 2019. Like the last 2 times, this time BJP has not got majority on its own, although BJP’s alliance NDA has got majority. Due to the election results, there was a huge sell-off in the stock market on June 4, while there is a recovery today i.e. on June 5. At present, Narendra Modi is going to form the government (Narendra Modi Govt) once again, but in a changed environment, where the alliance may put pressure on him. In such a situation, when there will be challenges regarding economic reform, how should an investor create his portfolio.

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Overweight on financial sector

Brokerage house Bernstein says that continuity of power is a strong factor to support the economy. We also think that there is a possibility of some focus on subsidies at the expense of capex, but we do not see any material impact in the near term. Based on what we are seeing, our previous stance on the market remains intact and we are positive. It is about better economic growth, but earnings growth has peaked, there is less scope for upward revision and to some extent the valuation is expensive.

Hence, we maintain our view of high single digit returns, with Nifty target unchanged at 23,500. Given the uncertainty on the policy front, a focus will remain. The brokerage house is overweight on the financial sector, but we have select options across sectors. We remain underweight on small and midcaps compared to large caps. In the short term, there is scope for a modest bounce in the market after the sell-off, with capex-related stocks leading the pack.

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Keep an eye on stocks available at ‘reasonable’ valuations

According to brokerage house Kotak Institution, the 2024 election results may force investors (institutional and non-institutional) to focus more on the numbers of each party and less on the narrative. We will keep an eye on any change in the attitude of retail investors, who have been the major force behind the market in terms of flows. We prefer sectors with high visibility of compounding in earnings/book available at ‘reasonable’ valuations and recommend avoiding ‘narrative’ stocks. Valuations are still at high levels for most sectors.

No need to be completely defensive

According to IIFL Securities, there is no need to be completely defensive. We expect somewhat higher interest rates and a weaker INR than before. But currently keep an eye on strong growth rates, mandatory monetary easing globally and in India, some structural reforms (such as GST) starting to take effect, improving balance sheets and visibility on a stable coalition at the Centre.

The brokerage house has expressed confidence in Sun Pharma (improving margins and earnings visibility) and Apollo Hospitals (temporary air pocket in the sector has been affected). At the same time, it has advised to stay away from highly priced sectors, FMCG (expensive) and defensive sectors like IT (many adverse conditions like slowdown in US economy and AI) for now.

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There will be softness in sectors with overheated valuations

According to brokerage house Motilal Oswal, after the initial disappointment and concern over government formation, we expect the focus to return to fundamental bottom-up stock picking. That said, sectors with overheated valuations and recent sharp outperformance such as industrial, railways, defense and PSUs may see a correction before becoming attractive again from a risk-reward perspective.

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No compromise on macro stability

Morgan Stanley says that there is no change in the outlook in the mid and long-term perspective. Volatility in the market is expected for a few days. According to the brokerage, the pace and direction of reforms will not change because the BJP-led NDA government will not compromise on macro stability. There is also no expectation of an increase in populist spending.