The recent rate hikes by the Reserve Bank of India (RBI) are positive and the Indian central bank had finally done away with nervousness surrounding the consequences of hiking rates, said Christopher Wood, global head of equity strategy at Jefferies.
"It is a positive, given the earlier hesitancy, that the RBI raised the policy repo rate by 50 basis points (bps) to 4.9 percent on June 8 and increased its inflation forecast for fiscal 2022-23 (FY23) from 5.7 percent to 6.7 percent. Another 50-basis-point rise should be assumed at the next RBI policy meeting in early August," Wood wrote in his Greed and Fear report.
Post the latest rake hike, Wood has rejigged his India portfolio. He replaced HDFC Bank in the financial space with HDFC in his Asia ex-Japan long-only portfolio.
“The investment in HDFC in the India long-only equity portfolio will also be removed and replaced by investment in HDFC Bank. While the investment in ICICI Lombard General Insurance in the India long-only portfolio will be reduced by one percentage point with the money added to HDFC Bank,” Wood wrote in the Greed and Fear report.
In the financial sector, he currently holds State Bank of India (SBI), Bajaj Finance, ICICI Prudential Life Insurance, ICICI Lombard General Insurance and Computer Age Management Services (CAMS), along with HDFC Bank, in his India long-only equity portfolio.
The report also noted that the Indian stock market continues to be held up by domestic flows while foreigners keep selling. "Domestic equity mutual funds have recorded net inflows of $19 billion in the first five
months of 2022, while foreigners have sold a net $23.4 billion of Indian equities year-to-date. The risk in the domestic flows is that about half was accounted for by retail investors investing directly last fiscal year, as opposed to into funds," it added.
The report further stated that Jefferies remains bullish on the Indian real estate sector, notwithstanding the inflation worries and the rising interest rate cycle, and believes that the housing cycle will continue to gather strength.
"From the late 1990s to around 2003, mortgage rates declined from around 15 percent to 8 percent, but the cycle stayed low. Then, during the upcycle of 2004-13, mortgage rates went up to 11 percent. With the RBI's current tightening cycle likely targeting rupee stabilisation, much more than growth reduction, we don't think this time is any different," the brokerage said in another note.
Jefferies believes that the upturn in the residential property market in India is already underway with volumes up around 35 percent over the trailing 12 months and prices rising in double digits in a few cities over the last four-six quarters.
Given the early stage of the cycle and ongoing industry consolidation, Godrej Properties, DLF and Lodha are its top real estate picks among developers. While other preferred picks include mortgage financiers (LIC Housing finance), contractors (L&T) and building material providers (Kajaria, Supreme).