Global brokerages bullish on Indian stocks despite poll-related uncertainty

Foreign brokerages such as HSBC, BNP Paribas and Morgan Stanley have turned bullish on Indian equities despite the election-related uncertainty. In its recent report, HSBC for instance, has raised its weightage on India from ‘neutral’ to ‘overweight’ and remains bullish on financial, metal, and consumer discretionary sectors in the Indian context.

“Aside from the elections, the macro backdrop is looking better in 2019 than in 2018. Inflation is low, and our economists are now looking for a rate cut in April. We expect overall GDP (gross domestic product) growth to accelerate, possibly supported by reforms (such as GST) starting to bear fruit,” wrote Herald van der Linde, head of equity strategy for Asia Pacific at HSBC along with Devendra Joshi and Prerna Garg in a recent report.

Adding: “Earnings growth remains one of the strongest across the region. And India is under owned – indeed, it one of the two largest underweight markets across the region as the moment. All this put together makes the case for being constructive on Indian market, in our view.”

Thus far in calendar year 2019 (CY19), Indian benchmarks have underperformed major global indices with a rise of around 1.8 per cent. Nasdaq Composite, CAC 40, Hang Seng, S&P 500, DJIA, FTSE and the Karachi 100 have gained higher in the range of 6 per cent to 12.1 per cent during this period.

Going ahead, analysts at BNP Paribas, too, expect the S&P BSE Sensex to rally from the current levels and hit 40,000 levels – up around 8.3 per cent from the current levels, but caution against election-related volatility in the first half of CY19. 

“The first half of calendar year 2019 (H1CY19) will be a difficult phase for the markets due to continued election uncertainty, potentially rising oil prices, earnings downgrades and weakening high-frequency data. Barring an extremely adverse election outcome, the positives could be a potential earnings revival led by continued policy reform, low interest rates, asset quality improvement at banks, and corporate capex recovering,” wrote Abhiram Eleswarapu, head of India equity research at BNP Paribas India in a recent ‘India Strategy’ report.

Voting to elect the 17th Lok Sabha will be held over seven phases from April 11 to May 19 with the counting of votes scheduled for May 23.

As a base-case to which they attach a 50 per cent probability, Morgan Stanley expects the S&P BSE Sensex to scale up to 42,000 levels by December 2019 - up nearly 14 per cent from the current levels. Their bull-case scenario for the index is 47,000 and in a bear-case scenario, they see the 30-share index at 33,000 levels.

“Recent news flow on pre-poll alliances creates the prospects of a more polarised election outcome. In our base case, May results may be close to call. If we are right about the growth cycle, the ballot may fade in the importance as 2019 unfolds, albeit with some ongoing volatility in share prices,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi.

Both HSBC and Morgan Stanley remain constructive on growth in corporate earnings with the former pegging the growth at 24.5 per cent in 2019e, with the top five contributors –

Reliance Industries, State Bank of India, Axis Bank, ICICI Bank, and Tata Motors – contributing almost half of all growth. 

In the Bharatiya Janata Party (BJP) gets a (single-party) majority in the upcoming general elections, UBS expects the Nifty50 to be around 10,000 – 11,900 levels by December 2019-end and in the range of 9,400 - 11,300 in case of a BJP-led coalition.