Credit Suisse upgrades India to overweight in APAC portfolio

The sharp turnaround in the economy coupled with a drop in Covid cases over the past few weeks has led Credit Suisse upgrade its stance on India to ‘overweight’ is its Asia pacific (APAC) model portfolio. India, it believes, looks much better positioned cyclically and relative to the pandemic.

“India suffered a severe outbreak but has seen a dramatic drop in infections, likely due at least in part to achievement of herd immunity in some locations. Earnings per share (EPS) momentum is among the regions’ strongest. Its credit cycle is at an earlier stage than perhaps all other APAC markets. The scope for rate cuts is greater than in perhaps every other market save Indonesia,” wrote Dan Fineman, co-head of equity strategy for Asia Pacific at Credit Suisse in a February 16 note.

Within Asia Pacific (ex-Japan), Credit Suisse is now biased towards second-phase Covid recovery markets—Korea, India, Australia, Singapore, and Hong Kong— and away from the early recovery markets (China and Taiwan) and the late-recovery markets in Asean.

Among other regions, Credit Suisse has downgraded China from 'Overweight' to 'Market Weight' in an APAC portfolio as it feels the most exciting period of its recovery has passed.

“China has limited potential for future GDP gains, negative EPS momentum relative to the region, late-cycle valuations and the region’s biggest potential payback from pandemic-related current account windfalls. We also cut Thailand from ‘overweight’ to ‘Market Weight’ for the opposite reason – that the most exciting phase of its recovery lies too far in the future in the first half of 2022 (H1'22),” Fineman wrote.

As regards India, the change in stance comes despite a sharp up move in equities from their March 2020 low. Since then, the S&P BSE Sensex and the Nifty50 have moved up around 96 per cent each. The rally in mid-and small-caps has been sharper, with both these indexes gaining 104 per cent and 121 per cent, respectively during this period on the BSE.

Credit Suisse expects inflation to rise in developed markets (DMs), and Australia typically is APAC's biggest beneficiary of rising consumer price inflation (CPI). “As with India, earnings momentum is strong, and the credit cycle early. The currency is one of the regions’ cheapest on a real effective exchange rate (REER) basis,” the brokerage house said.

Gaining momentum

Meanwhile, the economy seems to be getting back on track sooner-than-expected. The Nomura India Business Resumption Index (NIBRI) – a gauge used by the brokerage house to track economic activity in the country in the backdrop of the pandemic – picked up to 98.1 (provisionally) for the week ending February 14 from 95.9 the preceding week, which  suggests activity is now only around 2 percentage points (pp) below pre-pandemic levels.

A similar indicator used by BofA - the BofA India Activity Indicator – rose by 1.7 per cent in December after declines of -0.6 per cent and -0.8 per cent in November and October 2020, respectively. It ended the December quarter with a flattish 0.1 per cent growth, but has recovered sharply from -4.5 per cent in the September quarter and -20.7 per cent in the June quarter.

“We expect the growth uptrend to gain further momentum, with real GDP growth likely to rise by an above-consensus 13.5 per cent y-o-y in FY22 (year-end March 2022) from - 6.7 per cent in FY21, due to a combination of the lagged impact of easy financial conditions, stronger global growth, higher government spending and base effects,” wrote Sonal Varma, managing director and chief India economist at Nomura in a February 13 report co-authored with Aurodeep Nandi.