Credit Suisse sees near-term pains but bullish on India growth story

Suresh P. Iyengar | | Updated on: Dec 23, 2021

Further correction in equities may turn risk-reward favourable

Credit Suisse, a leading global investment bank and financial services firm, expects equity market to experience some near-term de-rating but the valuation multiples are unlikely to revert to pre-pandemic levels due to improved macroeconomic fundamentals and strong corporate balance sheets.

In its outlook for the first half of next year, Credit Suisse said the spread of Omicron could lead to some near-term growth worries but the government will not announce any stringent lockdowns.

In the near term, Indian equities remain susceptible to Foreign Portfolio Investors’ selling, and in the event of further corrections in the next few weeks, risk-reward may start turning favourable for equity investors.

ROE to grow for 38 Nifty cos

Credit Suisse believes about 30 per cent of Nifty constituents, which account for 35 per cent of the Nifty index weight, still offer valuation expansion potential. On the other hand, about 24 per cent of the Nifty constituents with 15 per cent weightage in the index have a high probability of valuation contraction.

“We also note that 38 out of 50 Nifty companies will see ROE expansion in the next two years versus the pre-Covid three-year average. Several companies having high valuations were added to the Nifty index over the past three years. Going ahead, we may see more new-age or internet-based companies getting added to the index. Thus, valuation may naturally look much higher than the historical average as India is experiencing an acceleration in the start-up revolution,” it said.

Reform agenda

If the government continues its reform momentum, India may continue to attract higher foreign direct investment inflows, while financialisation of savings and robust corporate balance sheet may support a revival in capex spending.

However, it said the Indian macro economy continues to remain vulnerable to fast-changing geopolitical equations, global macro shocks and the country’s excessive dependence on oil imports.

Moreover, the recovery in India is not broad-based yet and the government might have to allocate higher spending toward subsidies, including for food, fertiliser, and another less impactful spending especially in light of the fast-spreading Omicron virus and ahead of the several important state elections early next year.

Published on December 23, 2021
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