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Market Vulnerability Ahead of Union Budget
Bullish Sentiment and Stretched Valuations
CLSA warns that the domestic market faces extreme vulnerability as it heads into the Union Budget. The brokerage’s ‘India Bull Bear Index’ shows investor sentiment at 92% bullishness, the highest ahead of any Union Budget in the past 15 years.
Performance of ‘Modi Stocks’
Despite the overall bullish sentiment, ‘Modi stocks’—companies expected to benefit from favorable government policies—have not seen similar gains. These stocks have remained flat since the election verdict on June 4, while other sectors have risen by up to 12%. Fears that high expectations from the budget may lead to widespread disappointment explain this stagnation.
Composition of ‘Modi Stocks’
Before the election verdict, CLSA identified 54 companies as direct beneficiaries of government policies, with public sector undertakings (PSUs) making up half of these beneficiaries. These firms, primarily from capex and infrastructure-linked sectors, expected to rally based on the prospects of the BJP returning to power. However, following the election results, CLSA retained only two of these stocks in its India focus portfolio: ONGC and Reliance Industries.
Investor Sentiment and Market Risks
The extreme bullish sentiment, coupled with stretched valuations, makes the market setup highly vulnerable going into the budget. Elevated expectations from the budget are causing widespread disappointment across a large part of the market.
Conclusion
while the overall market sentiment remains highly bullish, the specific performance of ‘Modi stocks’ and the high expectations from the Union Budget pose significant risks. Investors should exercise caution as the market remains extremely vulnerable due to these factors.
