India outperformed most of its major global peers in August thanks to an improving macroeconomic outlook, sustained buying by foreign portfolio investors (FPIs) and easing commodity prices.
While the Indian benchmark (Nifty) rose 2.3 percent and FTSE advanced 2.8 percent in January-August, US indices S&P500 and Dow Jones lost 10.7 percent and 7 percent, respectively. Among Asian peers, Hong Kong's Hang Seng shed 15 percent whereas Japan's Nikkei declined half a percent.
After this surprise resilience shown by the Indian markets in the last month, Christopher Wood, global head of equity strategy at Jefferies has raised his exposure to Indian equities. The weightage of Indian equities has been increased to 16 percent in Wood's Asia Pacific ex-Japan asset portfolio from 14 percent earlier. Indian equities have the second highest weightage in that portfolio after China, whose weightage stands at 31 percent.
“Recent market movements, and the renewed lockdowns in China, prompt GREED & fear to make asset allocation changes in the Asia Pacific ex-Japan relative-return portfolio. With the Indian overweight having almost become Neutral, the allocation in India will be increased by two percentage points with the money raised by shaving the weighting in China,” Wood said in his GREED & fear report.
Wood added that he had expected Indian markets to consolidate in 2022 after recording strong gains in the previous year and the commencement of a monetary tightening cycle by global central banks, especially the US Federal Reserve (US Fed). He believes India is by far the best structural story in Asia.
“The reality is that the Indian market has so far surprised everyone, including GREED & fear, by its resilience in the face of bearish sentiment triggered by the wave of foreign selling, prevailing high valuations and monetary tightening. This resilience should be viewed as reflecting the strength of the structural story,” Wood had said recently.
Earlier he had said that he was looking to raise his India weighting and will buy Indian equities if the Nifty drops to around 14,000 or 14,500 levels.
Post the last rate hike in June, Wood had rejigged his India portfolio. He replaced HDFC Bank in the financial space with HDFC in his Asia ex-Japan long-only portfolio.
A major reason for the recent gains in Indian equities has been the return of foreign investors to India for the first time in July after 9 long months. Since mid-July, foreign investors have pumped around $7.64 billion since mid-July. In the first six-and-a-half months of 2022, they sold a net $29.7 billion worth of Indian stocks.
Apart from India and China, Taiwan has the third highest weightage in Wood's Asia Pacific ex-Japan portfolio at 10.5 percent followed by Australia and Korea at 9 percent each. Meanwhile, Hong Kong's weight is 6.5 percent and Indonesia is at 6 percent in Wood's portfolio. Malaysia has a 5 percent weightage whereas Singapore, Thailand and Vietnam stand at 2 percent each.
In a contrarian view, global brokerage house Credit Suisse stated that equities as an asset class have turned unattractive from a 3–6 month horizon. The global brokerage Credit Suisse has downgraded equities to an ‘underweight’ rating. However, it believes investors should not lose faith and would be ill-advised to exit markets completely given high inflation level.
"Market participants are now confronted with an environment of slowing growth, rising probability of recession, elevated inflation and – after the Jackson Hole Symposium – central banks that are determined to hike interest rates, and stay the course," the research firm stated.
"This signals a return to the asset price volatility that we witnessed in the first six months of the year," it further pointed out. The brokerage believes that the next few months are likely to be painful as markets adjust to this new reality.
Amid this backdrop, the brokerage reduced its tactical position for equities to underweight. The absolute return outlook for both developed and emerging market equities is outright unattractive too, said CS adding that the markets had factored in excessive hope and not enough economic realities.
