Morgan Stanley, Credit Suisse slowly turn positive on Indian equities

Global brokerages – Credit Suisse and Morgan Stanley – are slowly turning positive on Indian equities despite the uncertainty regarding the state and general election outcome over the next few months.

Besides Japan, Brazil, Thailand and Indonesia, analysts at Morgan Stanley have reiterated their overweight stance on India for 2019 and prefer utilities, IT services/software and capital goods sectors in the Indian context. 

“Alongside a managed slowdown in China, our economists are particularly upbeat on India and Indonesia, which will benefit from easier external conditions and macro-financial policies positioned for sustainable growth. India looks to be seeing a nascent recovery in capex spending,” the Morgan Stanley report co-authored by Jonathan Garner, their chief Asia & emerging markets equity strategist said.

As a part of its global strategy, Morgan Stanley 'double upgraded' emerging markets (EM) to an overweight and raised Japan from an equal-weight rating to over-weight. The GDP growth in EMs and earnings growth differentials versus the US, it says, should narrow going forward.

Credit Suisse Wealth Management that advised investors book profit in equities in the beginning of September has also changed its stance. The Nifty50 index, they said, is trading at a rolling 12-month forward PE (price-to-earnings) of 15.7x – slightly higher than its long-term average of 15x – and has corrected 10 per cent from January 2018, which now creates a good opportunity for bottom-fishing in high-quality companies, they said in their November report.

“Given earnings downgrades and looming state and central elections, we advise investors to remain cautious and stay away from debt-laden companies. Investors should focus on companies that delivered good results with improving outlook commentary by management. We like selected companies in consumer staples, energy and utilities, and private banks including corporate lenders,” wrote Jitendra Gohil, head of India equity research at Credit Suisse Wealth Management in a co-authored report with Premal Kamdar.

After a sharp sell-off that saw the frontline indices – the S&P BSE Sensex and the Nifty 50 – plummet nearly 12 per cent in September and October 2018, markets have recovered, albeit partially (up 1.6 per cent), in November. The correction in the mid-and small-caps was even steeper with both the indices on the Bombay Stock Exchange (BSE) slipping 13 per cent and 17 per cent, respectively in September and October.

OIL PRICES HELP

Besides the steep market correction that brought down valuations, the change in stance is also partially attributable to a fall in crude oil prices that have slipped from around $85 per barrel (Brent) mark couple of months ago to around $60/barrel levels now.

 

Since India is a net oil importer, movement in crude oil prices tends to have an important bearing on its macro stability risks (inflation, current account and fiscal deficits) and hence economic growth prospects, analysts say.

"A $10/barrel average fall in global crude oil prices narrows India's current account deficit (CAD) by $15 billion (0.5 per cent of GDP) and fiscal deficit by 0.1 per cent of GDP if domestic fuel prices are unchanged. A 10 per cent fall in oil prices could lower CPI (consumer price inflation) by about 20 basis points (bps) and would push GDP (gross domestic product) growth higher by 10bps if the price benefit is passed on to consumers," says Tanvee Gupta Jain, an economist at UBS.

If the current trend of lower oil prices is sustained through financial year 2019 - 2020 (FY20), at an average $60/barrel as against our baseline forecast of $75 - 85 per barrel, UBS' estimates India’s CAD to narrow to 1.5 per cent of GDP (currently at 2.4 per cent of GDP). This, in turn, could also help keep market sentiment buoyant.