Lok Sabha poll results: Portfolio shuffle may see capex-to-defensive switch

The election results are likely to cause a certain amount of market volatility until the shape of the next government is known. The lack of a majority for the BJP implies that the NDA partners will have a bigger say in crafting policy, and the BJP itself may look to change policy to address voter discontent.

In the short run, uncertainty will cause volatility.

The Nifty may possibly test supports in the zone of 21,200 again. The 200 Day Moving Average -- a benchmark for a healthy bull market is also close enough to that level. A drop below 21,000 could have long-term bearish consequences.

It remains to be seen how institutional investors will react to the political developments. FPIs were heavy net sellers through April and May and they were net positive on Monday, June 3. Domestic institutional attitudes may depend to an extent on mutual fund inflows, which are largely driven by retail attitude. If fund inflows remain strongly positive, the funds will be forced to buy.

One could see a shift in policy stance. One popular guess is that the new government will soft-pedal the current focus on infrastructure spending and divert more funds into welfare, maybe even adopting some version of the Congress promise to hand out Rs 1 lakh to women below poverty line. There could also be a shift in the policy focus on Atmanirbhar, which may result in downgrades of the valuations of defence-focussed stocks and of players like Dixon Technologies.  

In that case, investors will reshuffle portfolios to move funds out of sectors such as construction, cement, steel, heavy engineering and so on, and move into consumption-driven sectors such as FMCG, two-wheelers and tractor stocks. If the market sees signs that the new government is pushing consumption directly or indirectly, the FMCG sector could see upgrades across the board.

Two other sectors which are seen as defensive havens are IT services and pharmaceuticals. Both sectors are strongly export-oriented and tend to be seen as defensive plays, when there is domestic uncertainty.

There were big sell offs across the board today. Some of that was panic selling from highly leveraged traders. But the bearish attitude to infra and defence could persist if traders believe that policy in these sectors will change.

Government tenders in road, power projects etc., have naturally slowed down in Q1FY25 due to elections. Tenders through Q2FY25 could also be weak as the new government takes over. If there’s no pickup in activity by H2FY25, players in these sectors such as Larsen & Toubro, BHEL and Powergrid could see downgrades.

Energy policy is another question-mark. Upstream, midstream and downstream oil and gas stocks saw heavy selling on June 4, as did power sector stocks and metal companies. These sectors are dominated to a large extent by PSUs, and heavily policy-driven. For example, Oil India, ONGC, Gail, BPCL, NTPC, NMDC, Coal India, etc., all saw heavy selling.

Amidst all the uncertainty, one should note that the February 2024 Budget was an interim document and a new Budget will be presented soon. That would provide a sense of direction and an indication of the focus of the new government.

Meanwhile, GDP data and corporate data through FY24 indicates a cyclical upswing in the economy. That up-cycle may continue, regardless of what the next government says or does. Governments change every five years. India has done extremely well under coalition governments in the past. Sensible investors should not see this political result as a trigger for financial panic.