Capex-linked sectors may outperform in last 2 years of Modi govt

Deutsche Bank says capex-linked sectors and consumer cyclicals could outperform in the remaining two years of the Narendra Modi government. According to an analysis done by Deutsche Bank, the final two years of every national government since the P V Narasimha Rao-led one in 1991 have been consistently good for domestic economy linked sectors, particularly industrials and capital goods.

Three standout similarities were seen over the final two years of every political administration, Abhay Laijawala, head of research at Deutsche Bank said in a note.

“Government expenditure tends to accelerate over last two fiscal years led by capital expenditure. Capital goods production tends to pick up sharply in the final two years. Pro-growth government focus has led to Indian equity markets outperforming emerging markets and capex-linked sectors and consumer cyclicals tend to outperform the most,” the note said.

The brokerage firm’s top picks in this space include Larsen and Toubro (L&T) and Bharat Heavy Electricals (BHEL).

“With a five-year term accorded to governments under the Indian Constitution, India will face the next national election in 2019, leaving the government two years to reenergise the economy — through what has so far been an elusive investment cycle — and catalyse job growth,” Laijawala wrote. “On the back of expectations of rising government capex and urgent policy measures on resolving NPLs (non-performing loans), we are raising industrials to overweight in our model portfolio. Other preferred sectors include: Energy (refinery and marketing margin expansion on track, growth at a reasonable valuation); materials (cement to be a key beneficiary of public investment momentum); auto (lower rates and pay commission boost); IT services (deep value),” Laijawala said in the note.