Indian equities seen lagging other EM peers in the next few months

It is overweight South Korea and Japan but underweight China, Taiwan and Hong Kong
Emerging market (EM) equities are likely to outperform in the next few months, but India’s prospects look less attractive because of its rich valuations, according to estimates of two of the top European brokerages.

UBS believes that global equities, particularly EMs, are likely to outperform in the coming 3-4 months, before US equities catch up from the second quarter of 2021. The brokerage is neutral on India, and has estimated an earnings per share (EPS) growth of 25 per cent for 2021 and 15 per cent for 2022.

It is overweight on South Korea and Japan, but underweight on China, Taiwan and Hong Kong. It sees the S&P 500 rising to 4,100 next year, a 13 per cent rise from current levels.

“Although growth and earnings should rebound in 2021, recent performance has pushed (India’s) valuations into less attractive territory, unlike ASEAN,” said UBS, adding that the progress on the reforms front, the size of the Budget deficit and easing of lockdowns were factors to watch out for.

Credit Suisse expects EM assets, both bonds and stocks, to outperform and the US dollar to continue to weaken. It believes that the stimulus measures since the beginning of the pandemic together with the economic recovery will support financial assets, and equities in particular, in the year ahead.

“Equities continue to offer attractive return prospects, particularly compared with low-yielding bonds. We expect emerging market equities to catch up and see upside in German stocks. Our preferred sectors include healthcare and materials, with additional opportunities gradually emerging in cyclical sectors as the recovery broadens,” Credit Suisse said.

The brokerage, however, had an underperform rating on Indian markets: “Indian economy appears to be recovering from the virus-induced recession despite Covid-19 being not completely under control. However, we remain underperform on the market due to its expensive valuation, relative to other Asian markets.

UBS estimates that the Indian economy would have lost about Rs 20 trillion ($265 billion) between April and September due to the pandemic and the ensuing mobility restrictions. While economic activity appeared to be returning gradually to pre-Covid levels, the biggest challenge for India would be to get consumption back on track amid the virus fear, income uncertainty (job losses and/or reduced income levels) and a conservative policy response.

The brokerage expects India’s real GDP to contract 10.5 per cent in FY21, but bounce back to 10 per cent growth YoY in FY22 and stabilise close to 6.2 per cent YoY in FY23.

“Our baseline forecasts assume that consumption growth will normalise (but remain below trend) as both employment and income growth recover on normalisation in economic activity and hopes of pandemic coming under control after a vaccine is available,” UBS said.

While private corporate capex recovery is some time away, the brokerage says policy measures to boost public capex, especially infrastructure spending, could be the next catalyst for growth: “We expect India and Indonesia to execute on already announced reforms in the coming quarters. These help support our growth projections going into 2022.”

The rising fiscal deficit this year could lead to elevated public debt to GDP in India, thus, raising concerns, the brokerage warns: “A greater focus on privatisation could be explored to help keep a check on the fiscal slippages without constraining government spending.”

Indian market rally to continue on vaccine hopes

Bengaluru, 25 November

India's stock market rally is set to continue and hit new record highs in 2021, according to a Reuters poll of equity strategists who overwhelmingly expected corporate earnings to return roughly to pre-pandemic levels within a year.

The Nov. 12-24 Reuters poll of over 35 equity strategists predicted the BSE Sensex index, which is currently trading at a record high, would set new all-time peaks in the next year. It was forecast to rise about 3 per cent from Tuesday's high to 45,750 by mid-2021.

It was then predicted to rise another 4 per cent to 47,550 by the end of 2021, with forecasts ranging from 36,000 to 54,400.

Those forecasts were based on recent progress in developing Covid-19 vaccines even as cases rise around the world, according to over three-quarters of strategists, or 26 of 34, who answered an additional question.

Global stock markets have rallied since a sharp sell-off in March, ignoring deep recessions in most economies and driven largely by billions of dollars of fiscal and monetary stimulus and hopes for a swift economic recovery. Emerging market assets have also gained on the weakness in the dollar, which hit a three-month low against a basket of currencies on Monday. The Sensex has repeatedly hit record highs this month, surging more than 10 per cent on hopes for an economic revival on Covid vaccine progress.

"Looking ahead, continued improvements in global risk appetite will further boost Indian equities, despite the weakness of the economy," said Shilan Shah, senior India economist at Capital Economics.

From a low of 25,638.9 on March 24 at the start of the pandemic, the Sensex has rallied over 70% to a record high of 44,601.6 on Tuesday, marking about an 8% gain for the year.

That was despite Asia's third-largest economy shrinking nearly a quarter in April-June, much worse than forecast and pointing to a longer road to recovery.

India - the world's fastest-growing major economy until a few years ago - now looks to be headed for its first full-year contraction this fiscal year since 1979, according to a separate Reuters poll which predicted gross domestic product would take over a year at least to reach pre-Covid-19 levels.

But asked in the latest poll when corporate earnings would return to pre-Covid-19 levels, 28 of 32 strategists said within a year, including 10 who said within the next six months.

"We remain in a bull market that started in March, and even though one should expect corrections along the way, the equity market may have more legs before it tops out," said Ridham Desai, equity strategist at Morgan Stanley.

"We raise EPS estimates and (the) index target. As revenues slowed during Covid-19, companies were quick to cut costs to protect margins and profits relative to expectations. We are now seeing an improvement in earnings estimate revisions breadth and earnings estimates."

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