Want to buy shares in Asia’s most-expensive stock market? Stay with high-quality companies that better weather downturns and perform respectably on the way up.
That’s the advice from Bank of America
Merrill Lynch after Indian equities
posted multiple records this year, fueled by a tide of liquidity and optimism about the government policy. The euphoria has had the usual side effect: stocks have become expensive. The S&P BSE Sensex’s estimated price-earnings ratio has reached 22, the steepest among equity benchmarks in the region. A measure of smaller companies is even costlier.
“It is better to stick with companies that are delivering consistently, where the earnings outlook for the next three to four quarters does not lie in a wide range,” Sanjay Mookim, BofAML’s India equity strategist, said in an interview in Mumbai. “We advise clients that the operative philosophy in Indian equities
is to avoid risk.”
Mookim was the best Sensex forecaster last year among leading overseas brokerages tracked by Bloomberg. The index ended 2016 just 2.4 percent above his year-end target of 26,000. It closed at 33,314.56 Friday.
Sentiment has shifted toward companies with the reliable record of profits and sales growth, with Maruti Suzuki India, Hindustan Unilever and HDFC Bank being among the best performers on the Sensex in 2017. At the other end are drugmakers, the once favourite growth stories are now facing lower prices for generics in the US.
Stocks fitting into higher-quality buckets — retail banks, auto- and auto-parts makers and consumer companies — are few and pricey, Mookim said. Even so, investors must seek firms with robust earnings and avoid companies where the market is only “pricing in hopes of significant change,” he said.
“There’s a very narrow portion of the market that is steadily delivering and is expensive, but that’s my recommendation: boring portfolios, safe portfolios because valuations risks are high,” Mookim said.