India’s equity valuation froth has settled, says Credit Suisse Wealth Management

K.R. Srivats | Updated on: Jul 01, 2022

Currently we are staying neutral on India, says CS’s wealth management chief Ghoil

Credit Suisse Wealth Management India is currently “neutral” on Indian equities and may turn “positive” if equity valuations were to correct further in the coming days, Jitendra Gohil, Head - India Equity Research, has said. 

FPI outflows to continue

He also sees the ongoing Foreign Portfolio Investors’ (FPI) outflow to continue for the next three months and felt that the possibility of trend reversal would much depend on the geo-political outcomes and how hawkish US Fed would be this year to tame US inflation. 

FPI ownership of Indian equities as a percentage of market capitalisation has gone down as they are exiting India. It is currently at 19.4 per cent as against 10-year average of 20.2. Gohil said FPIs are selling — they have sold $25.7 billion in calendar year 2022 so far — because India’s valuation premium is elevated to peers and therefore the opportunity they are seeing elsewhere is brighter.

“Looking at a medium-to-long term story, FPIs will have to come back to India as we are still the fastest growing economy. FY24 March GDP growth got upgraded for India, which is rare, while other countries got revised downwards,” Gohil said.

Macro remains strong

“We are extremely positive on India’s macro. We are neutral on Indian equities just because of valuations. The valuation game has played out. Valuation froth has settled. Now we are at neutral level. If valuation somehow further goes down, then we will upgrade and be positive on India. We are pretty constructive for the next 2-3 years on the Indian economy as well as corporates,” Gohil told BusinessLine.

Gohil said that the argument that India’s valuation is “so frothy” is little bit on the back burner.  

“The valuation de-rating that equities should go through due to interest rates picking up is done. Don’t see dramatic de-rating  from here,” he said. Credit Suisse Wealth Management India sees 4-5 per cent cut in Nifty EPS earnings as of end March 2024.

He also does not see major downside to Corporate India’s earnings and pointed out that valuations have also corrected compared to pre-Covid or long-term average. India’s equity market resilience is backed by fundamentals and not just by retail inflows, he added.

“We (India) are currently trading at 10-year average PE ratio (both at about 17). Global indices (MSCI World) — whose 10-year average is 16 times — is trading at 14.3 times. India is trading at par with 10-year average. On a relative basis, India is expensive,” he added.

IT, metal stocks to remain weak

Sector wise, Credit Suisse is of the view that IT will give negative return from here, but banking sector can give 15 per cent return despite just six per cent overall return on Nifty expected. He also sees some headroom for correction in the metal sector.

“We think FMCG, banking and auto can actually give double the return than what Nifty will give you. If you are expecting 6 per cent return in Nifty, then these sectors can give 12-15 per cent return. Earnings upgrades would also be there,” he said.

Bullish on mid-caps

Credit Suisse Wealth Management India is quite bullish and “positive” on mid-caps and is on a risk-on mode, he said.

“In this correction, we are not shying away from mid-caps . Because the right way to play India story is via thematic ideas — bullish on chemicals, exports, consumers. We are buyers on mid-caps in this correction,” Gohil said.

Published on July 01, 2022
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