Stocks you should bet on in run-up to 2019 elections

The central government is expected to become more populist in the run-up to the 2019 general elections, as the ruling BJP will try to turn the tide in its favour after having losing three states in the Hindi heartland, analysts said.

They have started recommending investors to buy consumption stocks — specifically from FMCG, white goods, electrical & electronics and agro-chemicals sectors, and select financials — which typically benefit from populist government schemes.

“Our portfolio construction is biased toward large caps and also names with strong earnings visibility, resilience to macro risks and reasonable valuations — like ICICI Bank, HDFC Bank, SBI, Maruti, HUL, Titan, Infosys, L&T and RBL Bank,” said Gautam Duggad, head of research at Motilal Oswal Securities.

Historical data suggest that both central and state governments boost spending in the run-up to general elections, but it fades post elections as the new government restrains spending.

“Given the adverse outcomes in the three key states, we believe that the BJP government at the Centre is likely to turn incrementally more populist ahead of the Lok Sabha polls,” said Duggad.

Ritika Mankar, analyst at Ambit Capital, said: “We find that top-line growth of four sectors, namely FMCG, media, agricultural inputs and auto, responds to this flow and ebb whereby revenue growth of these sectors tends to rise in the run-up to a general election and then slows.” Mankar advised investors to sell overvalued stocks in these sectors closer to the elections, as an expected uplift in revenue growth in these sectors in the second half of this fiscal year “is likely to be ephemeral”.

Markets historically have observed heightened volatility in months immediately preceding general elections. Adding to that are the existing global macro headwinds like trade war escalation, slowing global growth, US recession concerns, as well as worries over the central bank’s autonomy.

However, the government is expected to spend aggressively, pump-priming the rural economy as well as stimulating the SME sector and some of the beneficiaries of these spending are set to gain, according to analysts.

“Thematically, we believe the consumption space will outperform others, specifically FMCG, white goods, electrical & electronics, agro-chemicals and select financials,” said Dharmesh Kant, head of retail, IndiaNivesh Securities. Referring to local and global political and macroeconomic issues facing the markets, he said: “We think every scenario throws up opportunity for quality stock investment ideas.”

Infrastructure, which attracts large government investment, isn’t a favoured sector in the election season.

Implementation of poll promises would reduce the government’s fund availability for infrastructure, even as the private sector is yet to step up investment in the sector, CLSA said in a note.

“Consumption plays, particularly rural ones such as M&M, Colgate, Crompton Consumer, ITC, TTK Prestige, Zee, Eicher and Maruti should benefit from such handouts,” it said.