It’s Time For Brokerage CLSA To Rename The ‘Modi Stocks’

In a bull market, everything goes, including slapping the prime minister’s name onto a category of stocks as brokerage CLSA India did ahead of this year’s general elections that started in April and ended in June. What was CLSA thinking? Was this the outcome of serious research or an SEO-led clickbait option?

The stocks which the brokerage pulled together were mostly in the infrastructure space that would benefit from public spending. There were also stocks of state-owned or public-sector enterprises. There was nothing wrong except that the bet, even if it was only optical, was on an individual and politician magically pulling all these stocks to great heights in the future. Like nothing else mattered.

The problem is now the tide is turning. A report just out from Bloomberg says the index of the so-called Modi stocks, CLSA’s term, has climbed only 2% as the prime minister completed his first 100 days in office after winning a third term in early June. In contrast, consumer and software stocks have rallied 20% and 34%, respectively.

That would mean that not only was CLSA drinking the Kool-Aid that it served to the larger world, but was also missing the woods for the trees. There’s no way of knowing whether the brokerage made money either way on other stocks including consumer and IT. It’s possible that it did.

The administration is “turning populist on the margin,” another disappointed-sounding strategist at Jefferies Financial Group Inc. wrote in a note quoted by Bloomberg adding that they expected the government could miss its target on capital spending. Incidentally, this is not to say the Modi stocks are not doing well. They are and are still on pace to outperform the nation’s main equity indexes for the fourth straight year.

But the index of such stocks had rallied 24% in the first five months of 2024, as the prime minister prioritised building infrastructure capacity while retaining focus on driving efficiencies at the nation’s state-run companies, says Bloomberg. In another sign of turning tides, domestic mutual funds have apparently started cutting their exposure to companies making capital goods in each of the three months since the June 4 election result, says Bloomberg, citing a note by Motilal Oswal Financial Services Ltd.

Foreign funds have also turned net sellers in sectors like utilities, cement, metals and financials in August, according to a Bloomberg Intelligence analysis.

There are a few points to consider in this situation:

First, CLSA was not alone in pinning their hopes on an individual-politician, perhaps they were a little more clickbaity in their proposition. Second, while capital spending may slow down and be replaced by moves to uplift the bottom part of the population — including with expanded insurance schemes and other subsidies — there is nothing to say that capital spend will grind to a halt. A breather might be a good idea.

Third, there was nothing conceptually wrong in the government’s strategy — as a strategy — in putting their weight behind public expenditure to propel economic growth and prosperity. No one is saying that this should be at the cost of public expenditure on education and health for instance but the larger question is how much and how long? Maybe a 8-10 year solid run was good but it is time now to start moderating and balancing out. Whether that would have happened if the election results were different is anybody’s guess.

The final and renewed lesson is that stock markets are mercenary at the best of times and can change tunes overnight. Politicians also know this but somehow often seem to forget. Meanwhile, the stock markets continue to rise. Agree or not, the government of the day has the right to take some credit for it.

But as always, some stocks are in flavour and others are not. And the current wave may be a little different from the last one. Perhaps CLSA will come up with a new term now, if not already.