It's only a matter of time before the Sensex touches 1,00,000, believes Jefferies' Christopher Wood, indicating a 62 percent upside from the current levels. In his latest GREED & fear report, the expert reiterated his bullish view on the Indian stock market and said that India's structural story is still intact.
Sensex can hit 1,00,000 in 5 years, says Chris Wood; adds Zomato to portfolio
"This target, on a five-year view, now assumes trend 15 percent earnings per share (EPS) growth and that a five-year average one-year forward price-earnings (PE) multiple of 19.8x is maintained," Wood wrote in his GREED & fear note. Still like all long-term bull markets, the Indian stock market will continue to climb the proverbial 'wall of worry', he said.
According to Wood, the one obvious worry over the next 12 months will be the questioning of whether Narendra Modi will be re-elected. Despite the recent defeat in Karnataka, the report highlighted that the overwhelming view remains that Narendra Modi and the BJP government will be re-elected, albeit perhaps with a reduced majority.
"Indeed the track record is that Karnataka has not re-elected an incumbent government since 1985. But in a national election the electorate votes on the big issues and here the dramatic changes wrought by Modi after ten years in power have been phenomenal," it said.
Another potential risk is a further reduction in retail investor activity following a period when the stock market has traded in a tight range, it cautioned, adding that the active brokerage accounts have declined from a peak of 3.8 crore in June 2022 to 3.1 crore in April 2023.
The markets have been range-bound in the last 20 months with the S&P BSE Sensex hovering in a tight 5,000-point range, which has allowed earnings growth to catch up with valuations, noted Wood. In this sense, India, he highlighted, is not as expensive as it was both in absolute terms and relative to the region.
"Indeed, the one-year forward PE at 18x is only slightly above the 10-year average of 17.4x, while the Nifty PE premium to Asia ex-Japan at 42 percent is also near the 10-year average of 38 percent," the report observed.
The report also mentioned that the Indian domestic asset management story in the big picture remains probably the most exciting globally. It informed that the ongoing inflow into domestic equity mutual funds, most of them via the Systematic Investment Plans (SIPs) deducted monthly from salaries, has been the key reason for the resilience of the stock market during the recent monetary tightening cycle.
Net inflows into domestic equity mutual funds totaled $20 billion in the past 12 months to April while monthly SIP contributions averaged $1.63 billion over the past 12 months, it revealed. Equities account for an estimated 4.7 percent of household assets of ₹11.1 lakh crore at the end of March, Wood wrote.
Another positive, as per Wood, is that foreigners have also returned of late as net buyers of Indian equities as they have retreated again from China. One issue here is that India’s neutral weighting in the MSCI benchmarks has always been inappropriately low given the size of the economy, he fears.
On the back of the aforementioned reasons, Wood noted that this is why GREED & fear has had an average of 40 percent exposure to India in the Asia ex-Japan long-only portfolio in recent years.
Within the portfolio, GREED & fear has always had since its inception at the end of Q3FY02 a weighting in Indian private sector banks which have been the best equity investment story in Asia in the more than 20-year period since the portfolio has been in existence, mentioned Wood.
The report also highlighted the "huge outperformance" of the Indian private sector bank index compared with the global banks index since it was established in April 2005. It revealed that the Nifty Private Banks index has risen 1,073 percent as compared to a 20 percent decline in the MSCI AC World Banks index during this period.
GREED & fear continues to believe that this property cycle can run for at least another three to four years given the seven-year duration of the preceding downturn and the resulting pent-up demand. Housing volumes are expected to grow by an annualised 15 percent over the next few years given that they only grew by an annualised 2 percent between 2010 and 2022, it said.
This means now is the time to add exposure to property stocks if it is believed that the end of the Indian monetary tightening cycle is at hand, advised Wood. These stocks went vertical in the second half of 2021 when it became clear that the property upturn was finally underway but they have traded sideways to lower during the RBI’s 290 bps monetary tightening cycle since last April. Still they are up 25 percent from the recent low reached in late March, it informed.
GREED & fear is already heavily invested in these stocks in the various portfolios but will take the opportunity to add to exposure this week. L&T and Thermax, which are both in GREED & fear’s long-only India portfolio, are currently trading at 24x and 36x FY24 earnings, respectively.
Still, one point to note about the property upturn is that it is very heavily skewed to the middle-class and luxury markets whereas the affordable housing segment remains relatively lackluster, it reported.
Wood has cut China's and Australia's overweight in the Asia Pacific ex-Japan relative-return portfolio, and increased the weights of India, Korea and Taiwan.
He also announced that the investments in HDFC Life Insurance and Standard Chartered in the Asia ex-Japan long-only portfolio will be removed and replaced by investments in SBI Life Insurance and India online food delivery platform Zomato. The investments in AIA Group, Bank Central Asia, Bajaj Finance, Godrej Properties and Macrotech Developers will also all be increased by one percentage point each, he added.
Meanwhile, in the India long-only portfolio, an investment in Zomato will be introduced with a 4 percent weighting, while the investment in HDFC Life Insurance will be removed. The investment in REC Limited will be increased by two percentage points by shaving the investment in Oil & Natural Gas Corp, Wood said.
An investment in Zomato will also be added to the global long-only equity portfolio. This will be paid for by shaving the investments in JD.com and Alibaba by two percentage points each, added the report.