At the start of the year, when the outlook on equities turned positive and inflows made a comeback, many thought it was a flash in the pan. Strategists monitored state elections closely and a lot of expectations were built around a possible easing in rates. None of this has happened, and yet global research houses have started upgrading India to overweight or market-weight. Goldman Sachs has upgraded India to marketweight from underweight, while HSBC Global Research has upgraded Indian equities to overweight from neutral.
Given that inflation is expected to rear its ugly head in the second half and the government is expected to go easy on key reforms, what is driving this upgrade cycle? For starters, despite the run-up, the markets are not expensive. The other factor driving the positive sentiment is the relative comparison with other Asian markets. Other than China and India, economists don’t expect monetary policy in other Asian countries to be supportive of equities.
Explaining their upgrade of India to overweight from neutral, HSBC’s Asia strategists say, “We believe monetary policy will be supportive (the first rate cut is expected in April) and that growth has bottomed. Analysts’ earnings estimates are already showing early signs of hitting a bottom.” From a funds point of view, the $8.8 billion inflows, too, have not resulted in the market being in an overbought region. HSBC is overweight on India and Taiwan, while it’s neutral on Korea, Malaysia and Hong Kong. It is underweight on Singapore, the Philippines, Thailand and Indonesia.
Apart from the change in stance on countries, market experts are beginning to question the potential of cyclical stocks in the current scenario. While Europe and the US are looking stable, high-octane growth is not likely in the near-term around the world. In these circumstances, the global outlook on cyclicals seems to be negative. Back in focus are the defensives. Goldman Sachs, which has also upgraded India to marketweight last week, says the decision reflects their preference for domestic themes. Goldman Sachs believes growth will indeed pick up in India over the next one to two quarters and the equity market will start to reflect these prospects in the coming months.