 "JP Morgan upgrades India to 'overweight' from 'neutral' ahead of elections")
JPMorgan has upgraded the domestic markets to ‘overweight’ (OW) from ‘neutral’ on the “positive historical seasonality to general elections.”
The investment bank joins US-based peer Morgan Stanley to flag preference for the Indian markets, which has been the leading performer in the emerging market (EM) pack since 2021.
JPMorgan sees cyclical and structural tailwinds benefiting the country.
On the cyclical front, the brokerage says “use near-term correction/dip as an opportunity to add and leverage on positive historical seasonality to general elections.” While on the structural basis, JPMorgan says.
“India offers the strongest EM nominal GDP compounding (demographic trends, infrastructure investment needs), it has competitive risk-adjusted returns to developed market (DM) equities, and a deeper domestic bond market should support lower risk premia,” said JPMorgan analysts led by Pedro Martins Junior, in a note dated on October 26.
Indian markets have come off around 6 per cent from their highs witnessed in mid-September.
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An analysis by JP Morgan reveals the Indian markets have generated positive returns ahead of the general elections.
A similar situation could play out during the first half of 2024, the brokerage said.
This will be underpinned by higher government spending, which will support consumption. Historically, the government has increased spending before elections.
The benchmark Nifty has delivered 13 per cent returns in the six months leading up to a national election since 1991, according to JPMorgan.
“As the 2024 elections draws nearer, the government may consider fresh initiatives like supporting rural India/urban poor and additional expenditures aimed at boosting public sentiment,” wrote JPMorgan analysts.
The brokerage is overweight on financials, auto, pharma, consumer staples, real estate. On the other hand, it is underweight on materials and energy firms (excluding Reliance Industries) and hospitals.
JPMorgan has added Sun Pharma, Bank of Baroda and Hindustan Unilever to its EM portfolio.
Last week, Morgan Stanley increased India’s weight in the Asia Pacific ex-Japan portfolio from 75 basis points (bps) OW to 100 bps OW.
“We increase our OW stance on Indian equities, as our most-preferred EM market. Relative economic / earnings growth is improving and the macro-stability set up looks sufficient to withstand the higher real rate environment. The dream run of domestic flows continues and multipolar world dynamics are driving both foreign direct investment (FDI) and portfolio flows towards India,” wrote Morgan Stanley analysts in a note last week.
Morgan Stanley believes India’s less global reliance puts it in an advantageous position.
“India has been structurally outperforming MSCI EM from early 2021 until October 2022, and we expect the outperformance to continue. India is starting to show a material breakout in relative earnings versus EMs and has relatively low correlation / revenues from both the US and China,” said equity strategists Daniel Blake and Jonathan Garner in a note.
Earlier this month, CLSA had said it is 303 bps overweight on domestic markets in MSCI Asia Pacific, ex-Japan portfolio, thanks to the supportive macro outlook.
During September-end, Nomura upgraded its stance on the Indian market from ‘neutral’ to ‘overweight’ and recommended a 100 bps higher allocation vis-à-vis India’s weight in the benchmark MSCI Asia ex-Japan index.
Meanwhile, JPMorgan has also upgraded Saudi to ‘overweight’ from ‘neutral’ as oil trades at a premium amid the ongoing geopolitical uncertainty.
The brokerage has downgraded South Korea to neutral from overweight as the country faces headwinds from higher US rates, slowing demand, and less accommodative monetary policy.
Not all brokerages are positive on India. Earlier this month, Goldman Sachs said global headwinds and rich valuations require a cautious approach ahead of next year’s elections.