Investors should forget white noises such as elections and trade wars, and buckle up for the next bull run, HSBC has said in a note.
“Many of the elements required for a sustained bull run are now in place. Sectors that have done well in past bull markets — such as banks, and some recent laggards, consumer discretionary, metals, energy and real estate — look well positioned,” the brokerage said in a note authored by analysts Amit Sachdeva, Anurag Dayal, and Herald Van der Linde.
HBSC has analysed key drivers for Indian equities over the past 20 years and applied it to the current state of the market. India has seen five bull markets, four bear markets, and six periods of temporary weakness over the past two decades. Our verdict is that most of the necessary elements are now in place for the start of a bull run, says HSBC, which recently upgraded its stance on the Indian markets from “neutral” to “overweight”.
“Valuations are well within the boundaries of the peaks and troughs of past bull and bear cycles. The earnings outlook for FY19 and FY20 is the highest in the region. Macro indicators, such as inflation, GDP growth, bond yields, and crude oil prices, also paint a positive picture,” said the note.
Last year, the Indian market averted entering the bear territory. The benchmark Nifty came off as much as 15 per cent between September and October. After bottoming out in October, the 50-share index is currently up 13 per cent from 2018 lows.
HSBC has listed several reasons behind improved sentiment towards domestic equities. It says inflation has been persistently low and is expected to remain stable, which would warrant another rate cut by the Reserve Bank of India in April. Also, India’s economic growth will remain healthy and among the fastest in the region.
On the global front, US bond yields have softened significantly and crude oil prices are “within the tolerance level,” it says.
In the past, rising bond yield and crude prices had led to turmoil in the Indian market. HSBC says India’s valuations are no longer excessive and most sectors are trading well below their five-year average. The benchmark Nifty currently trades at about 17 times its estimated one-year forward earnings.
Also, on the back of tepid flows over the past two years, the Indian markets are “quite under-owned by foreign institutional investors,” it points out. HSBC is the most bullish on the financial sector with Axis Bank, IndusInd Bank, HDFC Bank and Bajaj Finance being the key picks.
“Banks have outperformed almost every time the market has moved out of a bear market,” it says.
Besides financials, consumer discretionary (favoured stocks include Asian Paints, Kajaria Cements and Jubilant Foodworks); real estate (Godrej Properties and Prestige Estates); consumer staples (Avenue Supermarts and ITC); and energy (Gail and HPCL) are among the sectors the brokerage is positive on.
HSBC, however, has stated that the bull market prognosis is its non-consensus view. Also, there are key risks to the assumption.
“The deteriorating macro picture, such as a steep rise in inflation, any large-scale escalation in geopolitical tensions, a slowdown in global growth, or a sharp rise in crude prices,” are key risks, it says.