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The Modi effect continued to create ripples in the market on Monday, the first full trading session since the election outcome.
Even though the benchmark indices gained just 1%, the real action was seen in the small- and mid-caps, especially in companies dependent upon the domestic economy.
Investors dumped shares in the technology, pharma and consumer goods space---which were market darlings in the last few years---to stocks in the power and infrastructure space, which until recently had become untouchables with valuations crashing to historic lows.
Stocks in the power, infrastructure and realty sectors saw heavy buying on Monday with shares of JP Power surging 30%, GMR Infrastructure gaining 18% and Reliance Infrastructure surging 17%. Shares of several state-owned companies, including BHEL and Coal India, which vaulted more than 12% each, also got a severe boost.
Analysts said the aggressive buying in these stocks was spurred by hopes that the Narendra Modi-led government would push for economic reforms and tackle macroeconomic challenges such as fiscal deficit and inflation.
The BSE mid-cap index rose 4.2% and BSE small cap index gained 5.8%. While the BSE Power, PSU and Capital goods index saw even sharper gains of around 10% each, even as the benchmark Sensex and the Nifty gained just 1% each.
“Since the global financial crisis in 2008, the market has chosen quality over junk, growth over value, defensive over cyclical, and large cap over small cap. We are now seeing growing traction for extreme growth or non-quality factors,” wrote Ridham Desai, India equity strategist, Morgan Stanley India.
Most brokerages have started to advise their clients to aggressively bet on companies that are focused on the domestic economy.
“We think sector rotation toward domestic cyclicals should be a strategy investors should
continue to pursue. While some of these have moved up, valuations are arguably not stretched. ,”noted Gautam Chhaochharia, head of India research at UBS.
Jyotivardhan Jaipuria, head of research at Bank of America Merrill Lynch wrote that the process of “closing of the performance and valuation gap between the domestic cyclicals and the exporters” has began and this trade will continue if there is recovery in the domestic economy.
Shares in the IT, pharma and consumer goods space took a sharp beating due to this shift. TCS dropped nearly 6%, while ITC and Infosys fell 5% each. Pharma majors Dr Reddys' and Sun Pharma too declined about 5% each.
“With the economic turnaround and revival of manufacturing taking center-stage we recommend investors to intensify focus on domestic cyclicals and policy improvement plays,” said Abhay Laijawala, Head of Research, Deutsche Equities India in a client note.
The Indian markets also saw a host of upgrades, with several foreign brokerages increasings their targets for benchmark Indian indicies. US-based Goldman Sachs has increased its 12-month target for the National Stock Exchange’s Nifty from 7,600 to 8,300, implying a 14% upside from the present level. Japan’s Nomura has raised its year-end target for BSE’s Sensex from 24,700 to 27,200, while Citibank has increased its target to 26,300.
