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Global investment advisor Bank of America Securities has advised investors to remain on sidelines before dust settles. “At least in India, this is not a ‘Kid in Toy Shop’ moment. Unlike in 2008, quality, steady growth stocks are still far from being cheap,” BofA Securities analysts Sanjay Mookim said in a report.
“The market is down 20 per cent from February 10; the index is now at our fair value estimates from two years ago. Headline MXIN (MSCI India Index ) forward P/E of 14.7 times is back to 2014 levels, (below long-term average); while global monetary stimulus (that is supportive of valuations) is on overdrive. Fiscal expansion can help sentiment, but as a driver of EPS; not P/E,” BofA Securities analysts cautioned.
Sanjay Mookim, along with two analysts Nafeesa Gupta and Shikha Gupta, said i’'s not right to time to buy. “Sentiment around Covid-19 is driving global equities. Several large economies still need to contain the virus. This may require more drastic lockdowns and economic checks. That could drive a market undershoot.”
They sugest two approaches for investors who wish to make an investment. A rebound in stocks that have fallen the most (exporters/global cyclical) + large cap stocks that have contributed most to the index’s fall (Reliance Industries, HDFC, ICICI Bank, Infosys). This is short-term and opportunistic, and is a timing problem; and b) without economic growth, subsequent performance will remain with a narrow set of quality/low leverage stocks. On both counts, Indian private banks stack up well. HDFC Bank, ICICI Bank and IndusInd Bank are buy rated, they said in the report.
The global supply shock could recede rapidly with the virus — as seems to be now happening in China. The demand shock can last longer. This is likely to drive larger and broader than normal earnings cuts for the next few quarters. Though equities can move up eventually, driven by the current Supernova of liquidity, GDP growth is likely to remain weak for some time, they opined.
Leveraged stocks
Sanjay Mookim also cautioned investors on leveraged stocks. According to him, there were two historical templates: 2017 — market up-move accompanied by improving GDP growth. Stocks with higher leverage outperformed; and 2019 — equities up without GDP acceleration. Stocks with high leverage lagged.
“Any equity rebound now will look more like 2019, in our view — a weak economy drives topline concerns, in which case leverage will still be bad,” they added.
According to BofA Securities, unlike in the US, Indian BBB Corp yields have not moved up — as India is coming off higher spreads post the NBFC crisis in 2018. There should be little balance sheet refinancing risk, but there will be broad-based PnL/Cash flow risk. Again — avoid PnL leverage + Banks with low capitalisation and high SME exposure.
Domestic economy
“The recovery we hoped for is likely to take longer now; base effects may not help as much. The RBI may need to look for additional measures to drive lending (BofA Loan Growth Indicator still weak). Loan spreads need to come down; asset recognition norms need to be relaxed. A cut in GST seems to be the only effective short-term fiscal option, but appears unlikely to us (the Govt. is already struggling with revenue shortfalls),” they said in the report.
“Staples have meaningfully outperformed the fall, and will likely lag any short-term bounce. Post that, the environment now is supportive of margins and valuations. We currently have an underweight on the sector,” he further said.
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