Market has started pricing in too much of hawkishness: Jitendra Gohil

'Within the EM pack, barring high valuation, India's fundamentals are superior. But if oil prices spike further, we might see another round of sell-off in India', said Gohil

It has been a topsy-turvy May for global equity markets amid multiple headwinds. Jitendra Gohil, head-India equity research at Credit Suisse Wealth Management, in conversation with Puneet Wadhwa says foreign investors are concerned about the premium for Indian equities. Edited excerpts:

Do you think the structural bull-run is still intact in Indian equities? Or are we headed towards a bear phase?

This correction is separating the valuation froth. As bond yields start to rise globally, the relative attractiveness of debt juxtaposed with equities is improving. We might see some rotation away from equities as global central banks raise rates and end their loose monetary policies.

From an India perspective, we continue to remain positive on its structural appeal. We believe India is in a sweet spot, apropos of urbanisation, financialisation of savings, formalisation of labour, and growth in exports and manufacturing, including defence. Investors should stay put in sectors where structural growth opportunity exists.

Are Indian equities on a sell-on-rally or a buy-on-dip?

We are not recommending aggressive buying. But if the stock price falls to attractive levels, there might be an opportunity. From an overall valuation perspective, the Nifty Index is trading at a 12-month forward price-to-earnings (P/E) of 17.6x, in line with the pre-Covid three-year average and not far from the pre-Covid five-year average of about 16.9x. Hence, any further correction of say 5-7 per cent will make the valuation attractive and offer good buying potential.

How comfortable are you with present-day market valuations?

For the past year, we have been confident about India continuing to trade at a premium valuation versus its own history and peers. We uphold this view. Sure, there are growth headwinds and the sentiment is weak. However, the market has started pricing in too much of central bank hawkishness. If central banks move slowly on the rate-hike trail in the second half, considering the deterioration in global macro fundamentals, we might see a good bounce. Our return expectations are moderate nonetheless.

Is the next headwind for markets likely to come from worsening macros?

Yes, macros are weakening across the globe and India is no exception. However, for India, relative to its own history and versus other economies, deterioration is slower despite a higher oil-price environment. We continue to remain optimistic about Indian macros and believe India’s medium-term growth might be much better than consensus projections.

But India is not decoupled and global headwinds will dent macros here. Isn’t that a worry? 
 

Whether Indian macros will worsen further or not depends on geopolitical developments in Europe and in Asia. Prolonged geopolitical tensions are leading to higher energy and food prices across the globe. We are closely monitoring the developments.

From an equity market perspective, the earnings so far have seen marked resilience as some sectors have seen upgrades, others downgrades. However, the overall cuts to gross domestic product growth projections have not led to material earnings downgrades so far. We are currently 3-4 per cent below consensus for the next two years for Nifty earnings.

How are foreign institutional investors viewing Indian stocks?

Foreign investors are concerned about the P/E premium for Indian equities, i.e., the MSCI India is trading at 70 per cent premium versus the MSCI Emerging Markets (EMs) Index - much higher than the five-year and 10-year historical average of 50 per cent and 46 per cent, respectively. This is mostly because Chinese equities have seen massive deterioration in valuation and hence, India is looking relatively expensive versus EMs.

Foreign investors also watch out for reforms, where India seems to be faltering, especially taking into account privatisation. Moreover, oil prices have remained stubbornly high, which hurts India disproportionately.

Within the EM pack, barring high valuation, India’s fundamentals are superior. But if oil prices spike further, we might see another round of sell-off in India.

What is your strategy at this juncture?

We have been recommending investors to reduce risks and diversify portfolios within equities and asset classes. For Indian investors, we recommend corporate bonds, where yields are at an attractive level.

We have been rotating portfolios away from information technology into fast-moving consumer goods (FMCG) and private banks. 

If the market has to recover, we believe large private banks, FMCGs, and automotive companies will lead the rally.

Within mid-caps, we continue to like multiplexes, defence, and chemical and staffing companies.

Real estate is another sector that should do better if the Reserve Bank of India does not jeopardise growth through aggressive tightening.