Credit Suisse, a global wealth management firm, does not expect inflation in India to rise significantly above 7 per cent and therefore believes that investors would still be better off staying invested in assets that provide good inflation hedges like equities. In its India Market Outlook for October 2021, it highlighted that equities perform better in an inflationary environment up to 7 per cent and may start to hurt valuations if inflation exceeds 7 per cent.

The report has therefore recommended investors to rotate portfolios towards stocks that provide better inflation protection. “Within India, we remain neutral on equities and recommend investors focus on companies that are less susceptible to rising input cost pressures and are going to benefit from the reopening of economy”, said Gitendra Gohil, Head of India Equity Research and Premal Kandar, Equity Research Analyst in this research report.

“We like aluminium (a commodity we prefer over steel), large private sector banks, select FMCG companies, and sectors that benefit from the reopening of the economy, such as multiplexes, travel, hiring etc,” the Credit Suisse report said.

On the macro front, the report said that rebound in economic activities has continued to gain traction through August and September. Some of the high frequency indicators like electricity demand, railway freight traffic, GST collections and e-way bills indicate progress towards pre-pandemic levels, it added. The upcoming festive demand could accelerate growth and the country’s GDP growth may accelerate in the coming months as the economy opens up and the pent up demand materialises, the report noted.

Despite rising uncertainties in global markets, the Indian equity market has shown “remarkable resilience” and has materially outperformed the global equities last month. As a result, the valuation premium of Indian equities has expanded further and now stands at a record levels of 90 per cent versus the MSCI EM Index (10 Y average of 43 per cent). This performance is driven by India's improved corporate fundamentals, healthy equity inflows by both foreign and domestic investors, government relief measures for ailing sectors and steady improvement in vaccination/daily Covid-19 cases.

Q2 earnings: a mixed bag

Credit Suisse expects the current headwinds of higher commodity prices and rising shipping/freight costs to be visible in corporate earnings in the next couple of quarters. “Overall , we expect Q2 earnings to be a mixed bag, with beats on revenue growth driven by the good monsoon, festive buying and robust pent-up demand, but offset by misses on the margins front due to the rising cost pressures,” the report said.