News

Published: June 5, 2024
Updated: June 5, 2024

Momentum Stocks Face Uncertainty After Reduced Majority for NDA Coalition Election Impact on Momentum Stocks

Following the recent election results, momentum stocks, previously favoured by the market, are now experiencing significant pressure. The reduced majority for the NDA coalition has raised concerns that coalition politics might slow down policy actions. The BJP’s inability to secure a majority means it will need to consult alliance partners on key decisions, which could be market-friendly but politically challenging.

Major Market Correction

The India Election Index, which tracks stocks tied to the NDA coalition, dropped nearly 13% on June 4, compared to a 6% decline in the Nifty. This index includes 50 momentum stocks such as Adani Enterprises, Bank of Baroda, SBI, Cochin Shipyard, and GAIL. Despite a 3% rebound on June 5, the near-term outlook remains uncertain.

Valuation Adjustments

Many of these stocks had seen valuations become stretched after a strong rally over the past year. The recent correction, ranging from 12-25%, was seen as a necessary adjustment. Nonetheless, sectors such as PSUs, infrastructure, defense, and capital expenditure (capex) are still considered promising investment areas.

Sector-Specific Analysis

Power Finance and REC Stocks

These stocks have benefited from the government’s focus on manufacturing and capex, boosting demand for power. Power demand is projected to reach 260 GW in FY25, up from 243 GW in FY24. Government schemes have helped power companies reduce non-performing assets (NPAs). Despite the recent decline, valuations remain attractive due to anticipated growth in power capex.

Defence Stocks

Stocks in the defense sector, including those of major defense manufacturers, have surged due to initiatives promoting indigenous defense production and exports. Large order backlogs and significant contract executions are expected to drive revenue growth. However, dependency on government contracts poses a risk, making these stocks vulnerable to policy changes.

Shipbuilding Sector

Shipbuilding stocks have seen substantial gains due to increased budget allocations for the Navy. Companies specializing in submarines and destroyers have a competitive edge. Although the current order backlog supports earnings, future growth could be constrained if new orders do not materialize after the existing backlog is executed.

Container Corporation of India (Concor)

Concor shares have rallied due to expectations of government stake sales and progress on the dedicated freight corridor (DFC). With most DFC work complete, volume growth is anticipated to improve profitability. The structural story for Concor remains strong, with continued business, trade, exports, and imports expected regardless of election outcomes. However, the government’s focus on privatization remains uncertain.

The reduced majority for the NDA coalition has introduced uncertainty for momentum stocks, leading to significant corrections. While the near-term outlook is hazy, sectors like power, defense, shipbuilding, and infrastructure still hold promise due to ongoing government initiatives and structural growth stories. Investors should remain cautious but consider these sectors' long-term potential amidst the evolving political landscape.