After worst streak in 22 years, India's $3 trn mkt positioned for a rebound

By Chiranjivi Chakraborty and Ashutosh Joshi

With a key Indian stock benchmark about to notch its longest stretch of monthly losses in more than two decades, some analysts see the $3 trillion market positioning to bounce back.

The NSE Nifty 50 Index is on track for its fourth-straight monthly decline, its worst losing streak since 2001. The gauge is down nearly 9% in that span compared with a gain of about 3% in the MSCI Asia Pacific Index.

After outperforming over the past two years, Indian stocks are Asia’s worst performers in 2023 amid concerns over monetary policy tightening and weak sentiment due to value erosion at the Adani Group. But a number of strategists feel the stage is set for a rebound thanks to cheap valuations and strong domestic support.

“I view the recent underperformance as purely mean reversion after India’s stellar outperformance last year, especially relative to China,” said Mark Matthews, head of research at Bank Julius Baer & Co. “There is no fundamental reason for India’s longer term positive trend to change.”

Relative valuations have become more attractive for Indian stocks after the recent underperformance, according to Citigroup Inc. analyst Surendra Goyal. The Nifty is trading at about 17 times one-year forward earnings, below its five-year average of 19 times 

“While the growth outlook remains mixed, we note that Citi economists expect India to be the fastest growing large economy in 2023,”  Goyal wrote in a note earlier this month. “Also, we expect limited impact from the recent global banking turmoil on India.”

The high premium enjoyed by Indian stocks over Chinese peers has narrowed as well. The ratio of the MSCI India Index’s forward earnings valuation to that of the MSCI China Index has fallen to 1.4 compared with its five-year average of 1.7.

This is “another trigger for outperformance” by Indian stocks, along with continued strong domestic demand and the end of the local central bank’s tightening cycle, Christopher Wood, global equity strategist at Jefferies Financial Group Inc., wrote in a recent note.

That was echoed by Morgan Stanley, which upgraded Indian equities to equal-weight this week on benefits from their shrinking valuation premiums versus emerging-market peers as well as the resilient local economy.

Amid the concerns over geopoltics and bank stability rattling markets around the world, Indian equities are seen as relatively calm thanks to large steady inflows from local investors. The India VIX measure of stock volatility has declined over the past year and is more than five points below the Cboe VIX.

“Domestic liquidity is still supportive,” said Aditya Suresh, head of India research at Macquarie Capital Ltd. “That is something that has been supportive of the India story these past two years. Domestic investors have been holding this market together.”

Foreign investors, meanwhile, are on track to be net buyers of Indian shares for the first month since November. They have purchased a net $1.4 billion so far in March.