Investors should lower their holdings of Indian stocks on concern the nation’s ongoing elections may prove a “sharp disappointment,” the Credit Suisse Group said.
Shares appear to have priced in a victory for a “market- friendly, stable government” without factoring the possibility of other outcomes, the brokerage said. Regional investors should instead buy other so-called high beta markets and local shareholders should reduce their holdings of more volatile stocks such as Bharat Heavy Electricals (Bhel), they added.
The Bombay Stock Exchange Sensitive Index has gained 39 per cent since sliding to 2009 low on March 9, making India one of the 10 best-performing stock markets among the 84 tracked by Bloomberg in that period. The MSCI Asia-Pacific Index rallied 26 per cent since that date while the MSCI Emerging Markets Index climbed 32 per cent.
“Election uncertainties are now badly mispriced,” Credit Suisse analysts Nilesh Jasani and Arya Sen wrote in a report today. “Chances of a market-friendly government have not improved in the last few weeks. As a result, the near surety of such an outcome in the stock market has opened the doors for a sharp disappointment.”
The elections began on April 16 and votes will be counted on May 16. Opinion polls show that neither the Congress party-led United Progressive Alliance nor the main opposition, led by the Bharatiya Janata Party, win a clear majority.
Economy’s prospects
Gains in Indian stocks over the past two months also suggest that investors are overly “positive” on the prospects for the country’s economy, the Credit Suisse analysts said. The Reserve Bank of India said on April 21 the economy may expand 6 per cent in the financial year that started April 1, the slowest pace since 2003.
Even if the election results disappoint investors, signs of improved funding may boost growth at the companies, helping extend gains in share prices, Credit Suisse said. Unitech, the nation’s No 2 developer, was among the companies that sold shares this year to raise funds.
“If the capital market-based funding continues to be strong and somehow $5 billion to $10 billion worth of funding gets done in the next three months, corporate India could be back on a strong growth path,” the analysts wrote. Credit Suisse didn’t specify which “high beta” markets investors should buy at the expense of Indian equities. Bhel, the nation’s biggest power equipment maker, has gained 21 per cent this year, while Hindalco Industries, the country’s largest aluminum producer, has climbed 11 per cent. Credit Suisse lowered its rating on Bhel to “neutral” from “outperform” and downgraded Hindalco to “underperform” from “neutral” this month.