A hunt is on for new winners in India’s $4.6tn stock market as a narrower victory margin for Prime Minister Narendra Modi in national elections is seen spurring changes in his government’s policy mix.

Traders are betting that a weaker mandate will see the administration ramp up spending on welfare and development issues to appease the electorate ahead of some state polls due in the coming months. That, in turn, could shift some focus away from infrastructure creation that’s been one of Modi’s top priorities over his decade in power.

Consumer stocks are being touted as the biggest potential beneficiary of such a switch, particularly those focused on the nation’s vast hinterland. Other defensive sectors such as technology are seen becoming more prominent in investor portfolios, replacing relatively expensive shares of some state-run firms and industrial companies that have beaten benchmark indexes in recent years.

“The market is anxious if the policy emphasis on capital expenditure and investment will continue with the same fervour,” said Rajat Agarwal, an equities strategist with Societe Generale. “Industrials were trading above staples in terms of valuation. That itself is an anomaly.”

Here are some of the key sectors to watch and what analysts are saying about them:
Consumer goods

The NSE Nifty FMCG Index has jumped almost 6% so far this week to head for its biggest gain since late 2020. Shares of Hindustan Unilever Ltd — seen as a bellwether for consumer appetite in India as its products are sold in every part of the country — have surged almost 10% as brokerages including Jefferies Financial Group Inc upgraded their recommendation.

Potential policy interventions by India’s new government can support rural consumption and drive near-term economic growth, Citigroup Inc analysts including Vismaya Agarwal, wrote in a note. Expectations of a good monsoon are also supportive, they added.

Strategists at Goldman Sachs Group Inc upgraded the staples sector to neutral from underweight on likely rural support from the potential reallocation of government spending.
Housing finance

Analysts at Jefferies see the possibility of the new government announcing a revamped affordable housing scheme in the upcoming budget, which could benefit shares of home financiers.

Home First Finance Co and Aavas Financiers Ltd should be direct beneficiaries of the housing scheme, according to Citi. Large players with presence in the mid-ticket size segment, such as LIC Housing Finance Ltd and Can Fin Homes Ltd, may also see some tailwind from the scheme.
Other defensives

The weaker mandate for Modi’s ruling party means that it has had to rely on two crucial allies in its coalition to form the government. Concerns that may slow down policy-making is prompting some investors to add more defensive stocks to their India portfolio. They want to wait and see who will be appointed to key cabinet positions under the coalition government, and whether it can achieve policy continuity.

Strategists at CLSA are overweight commodities and tech, along with insurance and staples. They replaced engineering giant Larsen & Toubro Ltd with software firm HCL Technologies Ltd in their India focus portfolio this week.

“Given the uncertainties over the policy environment in India’s new coalition government, the market could gravitate toward franchises with higher quality such as staples, discretionary and tech in the near term,” Nitin Chanduka, a strategist at Bloomberg Intelligence, wrote in a note.
State-owned enterprises

Investors expect some froth to come out of the shares of state-run Indian firms. That’s owing to concern that a coalition government may dilute the administration’s focus on improving corporate governance at state-owned firms, which has helped turn their shares into big winners in India’s market.

Some analysts, such as those at HSBC Holdings Plc and CLSA, are bullish on private Indian banks given their relatively better valuations.

The jury is still out when it comes to the infrastructure sector — the mainstay of Modi’s decade in power. While concerns have emerged whether Modi will continue with his nation-building push as he seeks to position India as an alternative to China, some investors are keeping faith in the sector’s prospects.

The NSE Nifty Infrastructure Index tumbled almost 11% on the day of election results, but it has risen in the past two sessions, a trend similar to the broader market’s performance. Strategists at Goldman Sachs are among those who remain overweight on industrials.

Meanwhile, Chanduka of Bloomberg Intelligence sees industrials as vulnerable to “potential derating as a slowdown in additional capex is likely.”
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