PM Modi's likely 3rd term baked into stock market valuations, says CLSA

Foreign brokerage CLSA in its India Theme 2024 note said while election years have historically delivered good equity returns for Indian stocks, the best-case scenario in which the Prime Minister Narendra Modi returns for a third term is already being baked into valuations, adding that the reduced likelihood of positive surprise and change means this election year may be muted. 

Indian market’s valuation premium to its historical average is the highest recorded among the 19 largest global markets, CLSA said. India, it said, is no longer the earnings growth leader that it has been for the past three years.

At 20.2 times, Nifty’s PE has been higher on only 8 per cent of days over the past 18 years. The Nifty earnings yield discount to the Indian 10-year government security yield, at 2.2 percentage points, also puts equity valuations relative to bonds at levels only seen on 3 per cent of days since 2005, and is a position from which one- and two-year returns have historically been negligible, CLSA said.

Along with an extended 95 per cent bullish sentiment reading in CLSA's proprietary India bull/bear index, these factors led CLSA to tone down its expectation of near-term Nifty returns.

"Notwithstanding India’s exciting long-term growth story and the prospect of a third term for popular PM Modi, this stretched starting point may weigh on returns this year. While India’s EPS growth should be steady, it will not be the fastest among top world markets. Yet it is trading at the biggest relative premium. We believe equities are pricing in a “perfect” US soft landing and any disappointment on growth or sticky inflation will hurt stocks," CLSA said.

In the consensus soft landing scenario, a bigger share of foreign institutional inflows (FII) will come from non-India dedicated funds, which should support mega-caps over small-/mid-caps, CLSA said.

"Our India focus portfolio has beaten the Nifty in all 12 quarters since inception, rising 160 per cent and outperforming by a total of 99 percentage points. We now favour mega-caps, banks, insurance and energy," CLSA said in a January 4 note.

CLSA expects banks, Larsen & Toubro Ltd (L&T), Bharti Airtel and select material names to make an outsized contribution to the Nifty’s earnings growth and delivery on this will be crucial, it said.

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