India to outperform Asian, EM peers; high valuation a challenge: Chris Wood

Will remain slightly Overweight India in the Asia Pacific ex-Japan relative-return portfolio, says Christopher Wood, global head of equity strategy at Jefferies in his GREED & Fear note to investors.

Indian equity markets are likely to outperform their Asian and emerging market (EM) peers, wrote Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear.

“The valuation differential between India and China has reverted to its traditional mean after the huge 65 per cent outperformance of MSCI China over MSCI India since the end of October 2022 to late January following the China re-opening. This sets up the potential for renewed outperformance by India in an Asian and EM context. The domestic demand story certainly remains intact to justify the continuing belief in the equity market,” Wood said.

That said, the challenge, as always in India, Wood believes, remains relatively high valuations. The Nifty Index is trading at 17.4x earnings on a 12-month forward basis, compared with a long-term average of 16.2x since 2008. Yet, he remains bullish on Indian equities across his portfolios.

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While Nifty earnings are forecast by consensus to grow by 9.7 per cent this fiscal year and 20.7 per cent in FY24. GREED & fear will remain slightly Overweight India in the Asia Pacific ex-Japan relative-return portfolio. But in the Asia ex-Japan long-only portfolio, which is long-term by nature and less benchmark focused, a dominant 39 per cent of the portfolio remains invested in India,” Wood said.

On a year-to-date (YTD) basis, the Nifty50 has underperformed its Asian peers by falling nearly 7 per cent. In comparison, other indices such as Nikkei 225, Shanghai Composite, Taiwan Weighted and Kospi have gained up to 12 per cent during this period, data shows.

Sticky flows

Another key positive for the Indian markets, Wood said, are the 'sticky' flows coming from the systematic investment plans (SIPs) of retail investors. Net inflows into equity mutual funds rose from Rs 110 billion in December to an eight-month high of Rs 186 billion in February, after bottoming at Rs 42 billion in November.

“It is certainly impressive that, despite $2.8 billion of foreign net selling of Indian equities year-to-date (YTD), domestic equity mutual fund inflows have remained positive with the latest data showing a renewed pickup. Such inflows are stickier than the activity of retail punters speculating via derivatives and represent an ongoing structural positive for the stock market," Wood said.

The Reserve Bank of India (RBI), Wood believes, has been able to contain inflation – and after 290 basis point (bps) rate hike since April 2022, the Indian central bank, he said, seems to be nearly done with monetary tightening.

“All of the above means to GREED & fear that a private sector-led capex cycle is now due, if not overdue, given that the banking system is healthy in terms of an eight-year low in the non-performing loan (NPL) ratio, the corporate sector is unleveraged and profitability is rising in terms of listed companies’ ROE. The MSCI India’s ROE has risen from 9.8 per cent in FY20 to 15.3 per cent in FY22 and an estimated 13.2 per cent in FY23 ending March 2023,” Wood said.

Despite the correction in the market's valuation, analysts at Credit Suisse Wealth Management India do not rule out more downside going ahead, which they believe should be used as an opportunity to buy for the long-term.

“The valuation of the Indian equity market has corrected over the past few months toward its 10-year average, but cannot rule out some further correction given current global developments. We remain cautious in the near-term and would use any sharp corrections as a buying opportunity as we expect a good recovery in Indian equities in the second half of the year,” wrote Jitendra Gohil, director - global investment management at Credit Suisse Wealth Management India in a recent coauthored note with Premal Kamdar.