While remaining overweight on India, Jefferies' Christopher Wood in his latest GREED & fear note informed investors that a dominant 39 percent of the portfolio remains invested in the Indian market in the Asia ex-Japan long-only portfolio.
6 reasons why Chris Wood believes India may outperform Asian and emerging market peers
Wood believes that there is potential for renewed outperformance by India in an Asian and emerging market context. However, he pointed out that the challenge, as always in India, remains relatively high valuations.
Wood believes that there is potential for renewed outperformance by India in an Asian and emerging market context as the valuation differential between India and China has reverted to its traditional mean.
However, he pointed out that the challenge, as always in India, remains relatively high valuations. Nifty index is on 17.4x earnings on a 12-month forward basis, compared with a long-term average of 16.2x since 2008, he highlighted.
"While Nifty earnings are forecast by consensus to grow by 9.7 percent this fiscal year and 20.7 percent in FY24. GREED & fear will remain slightly Overweight India in the Asia Pacific ex-Japan relative-return portfolio. But in the Asia ex-Japan long-only portfolio, which is the long term by nature and less benchmark focused, a dominant 39 percent of the portfolio remains invested in India," said the note.
A look at some key reasons behind Wood's bullish outlook for India:
India-China Valuation Gap
As per Wood, the valuation differential between India and China has reverted to its traditional mean after the huge 65 percent outperformance of MSCI China over MSCI India from the end of October 2022 to late January following the China re-opening. Thus, Nifty’s PE premium to the China H-share index (HSCEI) has declined from 208 percent at the end of October to 115 percent, in line with the 10-year average of 118 percent.
"This sets up the potential for renewed outperformance by India in an Asian and emerging market context, most particularly as Jefferies head of India research Mahesh Nandurkar has been arguing of late that dedicated long-only foreign investors are Underweight India," Wood's GREED & fear note said.
The note also pointed out that it is certainly impressive that, despite $2.8 billion of foreign net selling of Indian equities in 2023 year-to-date, domestic equity mutual fund inflows have remained positive with the latest data showing a renewed pickup. It highlighted that the net inflows into equity mutual funds rose from ₹11,000 crore in December to an eight-month high of ₹18,600 crore in February, after bottoming at ₹4,200 crore in November.
It further noted that most of these inflows continue to come from the Systematic Investment Plan (SIP) where monthly inflows are debited from salaries, adding that SIP inflows rose from ₹13,600 crore in December to a record ₹13,900 crore in January and ₹13,700 crore in February. Naturally, such inflows are stickier than the activity of retail punters speculating via derivatives and represent an ongoing structural positive for the stock market, said Wood.
Domestic demand story intact
Wood further stated that the domestic demand story certainly remains intact to justify the continuing belief in the equity market. While the loan growth has slowed somewhat, the note said that it still remains solid at 15.5 percent YoY in late February, down from 18 percent YoY in early October.
"The confidence of Indian private banks is reflected in operating expenditure opex) growth rising by 21 percent YoY in FY22 and 23 percent YoY in the three quarters to December, the highest growth rate in ten years. This includes investment both in digital platforms and the expansion of new branches," he said.
Another important aspect of the same is that the recovery in the residential property market also continues even as mortgage rates have risen to 8.7 percent, stated Wood's note. Primary residential sales in the top seven cities monitored by consultant PropEquity rose by 7 percent YoY in January, while inventory in the top seven cities is at 10-year lows running at 18 months of sales. The average selling price increased by an estimated 10.2 percent YoY in the top seven cities in Q1CY23, it mentioned.
Money tightening nearly done
Wood also observed that the monetary tightening cycle also looks all but done, following 290 bps of tightening since April 2022, with the policy repo rate now at 6.5 percent. Inflation remains relatively well-behaved with the headline CPI and the core CPI rising 6.4 percent YoY and 6.1 percent YoY respectively in February. However, the money markets are now discounting at most one more rate hike in this cycle, said Wood. Now, the Reserve Bank of India (RBI) projects inflation to decline to 5 percent YoY in the first quarter of FY24, the note added.
Capex cycle due
As per the note, the economic indicators suggest that a private sector-led capex cycle is now due, if not overdue, given that the banking system is healthy in terms of an eight-year low in the non-performing loan (NPL) ratio, the corporate sector is unleveraged and profitability is rising in terms of listed companies’ ROE.
"India's gross NPLs have declined from 11.2 percent in FY18 to an estimated 4.7 percent in FY23, the lowest level since FY15. Private non-financial corporate debt has declined from 78 percent of GDP at the end of 2012 to 52 percent, while the gross debt-to-equity ratio for the 600 large listed companies is now only 0.6x, down from 1.0x in FY15. Finally, the MSCI India’s ROE has risen from 9.8 percent in FY20 to 15.3 percent in FY22 and an estimated 13.2 percent in FY23 ending 31 March," he explained.
The word is that corporates’ capex plans are up 25 percent for the coming fiscal year starting 1st April, though there is no statistical confirmation as yet, he informed in the note.
It is important to note that any pickup in private sector capex will be on top of the significant capital spending undertaken by the Modi government in recent years. In this respect, it is worth noting again that the government in the budget announced on 1st February resisted the temptation to be populist in a pre-election year, said Wood. The general election is due to be held in May 2024.
"Government capex is budgeted to rise by 37 percent to ₹10 lakh crore or 3.3 percent of GDP in FY24 beginning 1 April, up from ₹3.4 lakh crore or 1.7 percent of GDP in FY20, while non-capex expenditure is due to increase by only 2 percent YoY in FY24," it specified.
Further evidence of economic resilience and reviving animal spirits is continuing strong GST revenues and buoyant retail sales, noted Wood. He pointed out that the GST collections have risen 12 percent YoY to ₹1.5 lakh crore in February and were up 23 percent YoY to ₹16.5 lakh crore in the 11 months of this fiscal year (April 2022 – February 2023). Also, the Retailers Association of India reported that retail sales in February were 22 percent higher than the pre-Covid February 2020 level, and were up 18 percent in the 11 months of this fiscal year, it added.
Meanwhile, with the rupee down 10 percent against the US dollar since the start of last year but flat year to date, foreign exchange reserves totaled $560 bn as of 10 March, which is equivalent to 9.4 months of imports. This is down from a record $642 bn in September 2021. The bond market has remained relatively calm, with the 10-year government bond yield at 7.33 percent, down from a recent high of 7.62 percent in June 2022, stated the report.
Meanwhile, there is growing optimism that the Modi government’s Production Linked Incentive (PLI) scheme targeting 14 industrial sectors should, on a ten-year view, lead to a big pickup in the manufacturing sector to supplement India’s longstanding progress in services, most particularly IT services. Still, such a development will probably require Modi to be re-elected, he noted.
Lastly, the Ukraine conflict has continued to provide an indirect windfall in the sense that India’s oil imports from Russia have surged from 0.4 mn tonnes in March 2022 to a record 6.05 mn tonnes in January. The Russian oil price is now trading at around a 35 percent discount to the Brent crude oil price, it added.
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