Even as credit rating agencies excitedly downgrade India, a foreign broking outfit has upgraded Indian equities to ‘Overweight’ from ‘Neutral’. JP Morgan has not only given India an upgrade but it has said that it is ‘Overweight’ on private banks, IT services and healthcare. At the same time, it has an ‘Underweight’ rating on consumer discretionary, energy and materials.
After analysing the impact of change in interest rates, currencies and margin outlook, JP Morgan feels that India is a clear winner.
Here are four reasons why JP Morgan has upgraded India:
Lower oil prices are expected to help control and reduce the country’s current account deficit. The rupee price of Brent oil is 18 per cent lower than its 2012 peak. Lower oil prices also reduce the fiscal deficit due to reduction in subsidies of PSU oil companies.
The sharp depreciation of the rupee will help boost the country’s growth. The recent currency depreciation is equivalent to a 100 basis point cut in repo rates. Higher exports and import substitution should follow currency depreciation. This is the second driver for a lower current account deficit.
Additional rate cuts by the central bank can help propel growth. JP Morgan expects RBI to cut repo rate and cash reserve ratio. The impact of monetary easing on the economy occurs with a lag. While analysts are downgrading their forecasts, JP Morgan says that GDP revisions lag the monetary cycle. JP Morgan feels an upgrade cycle will start in late 2012.
The market appears to have priced in most of the negatives with the earnings per share of MSCI index stocks trading one notch below its 10-year average.
JP Morgan says higher oil prices, lower rainfall and policy paralysis are the possible risks to its forecast.