Jitendra Gohil of Credit Suisse
Credit Suisse Wealth Management is still tactically neutral on India equities – not underweight and advises investors to buy the dip as India’s medium-term outlook remains very attractive, Jitendra Gohil, the Head of India Equity Research says in an interview with Moneycontrol.
The global economic environment has weakened but India appears to be in a sweet spot, given the marked improvement in corporate and macro fundamentals, Gohil says.
However, he also says that equity investors should diversify portfolios, cut leverage and apply more prudent and more defensive strategies because the valuation comfort has faded after an almost 15 percent rally from the recent lows in the past few weeks.
The global wealth management firm has mild overweight recommendation on mid-caps since the end of last year and has continued to stick to that position despite the volatile environment, says Gohil, who is responsible for generating investment ideas and proposals for Credit Suisse Wealth Management clients.
Do you see any major possibility of equity markets returning to June lows in the short term, given the still-weak global economic environment?
We are still tactically neutral on India equities – not underweight – in a portfolio context. Also, we have been of the view that investors should buy the dip as India’s medium-term outlook remains very attractive. Clearly, the global economic environment has weakened but India appears to be in a sweet spot, given the marked improvement in corporate and macro fundamentals that we highlighted here last time. There is only a slim possibility that the index might go back to the June lows as, in our view, the market has already started discounting the rate cuts the US Federal Reserve could potentially be making in 2023. We could see renewed pressure on Indian equities should oil prices shoot up above $ 120-125 a barrel owing to a further escalation of geopolitical tensions.
Also read – Interview | Bank privatization will reduce long-term loan exposure, says former chief statistician
What is the reason behind maintaining a mild overweight position in midcap stocks?
We have ‘mild overweight’ recommendation on mid-caps since the end of last year and have continued to stick to that position despite this volatile environment. At Credit Suisse Wealth Management, we focus on long-term fundamentals and structural themes and believe that the midcap sector is witnessing some healthy tailwinds arising from the increased participation of retail and domestic investors.
Foreign portfolio investors (FPIs) do have the constraint of allocating capital to various countries and given India’s record-high P/E (price-to-earnings) premium, they tend to adopt a cautious approach toward the Indian stock market near term despite India being in a structurally sound position. The focus of FPIs has predominantly been on liquid stocks, which are typically represented by large caps – also one of the reasons we maintain a mild overweight in midcaps despite volatility. Furthermore, we are particularly convinced about the underlying growth stories in India’s defence, exports, import substitution, chemicals and urbanisation sectors, the ones largely represented by the midcap sector.
Do you still expect more weakness in the Indian rupee, though India’s healthy forex reserves may help to prevent a sharp depreciation? Also, in a recent report, you said the RBI would hike interest rate up to 5.65 percent, against the market expectation of 6 percent. Why are you less hawkish relative to other market participants?
Yes, India’s foreign exchange reserve position is strong but it is precious, especially when geopolitical tensions are on the rise. The RBI has a tough task of managing inflation, interest rates and the rupee while being mindful of the fact that it does not curb growth too much.
Also read – Interview | A Fed rate hike pause is coming and so is a rate cut, says Julius Baer’s Matthews
If monetary policy stays tight, the INR could find some support but growth might take a knock. For India’s capital and job starved economy with 140 crore population, the RBI should support growth. We are of the opinion that the central bank will keep its policies growth-supportive and allow the rupee to drift lower, which should promote exports and curb imports, particularly at a time when the country is facing one of the worst trade deficits. It is not just the rupee that has depreciated against the USD, other major currencies such as the euro, renminbi, British pound and Japanese yen have depreciated, too, and even more than the rupee. We are closely monitoring the renminbi – India’s trade deficit with China is the highest – which has come under renewed pressure and weakened against the rupee over the past few weeks.
For a country like India where around 40 percent of the population is below 20 years and job growth is not picking up the way we would have liked to see, economic growth becomes one of the most important parameters to maintain social and financial stability. Growth has been greatly dependent on foreign capital. Hence, the RBI’s policies have been supportive of growth, in our view.
In our analysis, the country should withstand 7-8 percent consumer price inflation (CPI). Should the rate of inflation overshoot the 7-8 percent level, growth could begin to fall off, increasing risks for financial stability. Relative to several economies, India is in a better position so far in terms of controlling inflation and managing the rupee. However, if inflation surpasses the 8 percent mark, the RBI may be forced to tighten aggressively by sacrificing growth, in our view.
Do you see a good festive season this time? If yes, then which are the sectors to focus on?
As we had noted last month, we see a good festive season ahead because, after all, participation in festivities is expected to be normal after a gap of two years. Initial data points to improving consumer spending, e.g. credit card spending, footfalls in malls, travel, retail credit, etc. Retail-focused banks/non-banking finance companies and fast moving consumer goods continue to remain our favoured sectors along with autos. The travel and tourism sector, including aviation, looks good from a near-term perspective, especially if oil prices remain well anchored.
Rural demand is picking up but given the patchy monsoon season we have witnessed so far and lower Kharif sowing data, the demand scenario needs a close watch. If rural demand picks up, supported by better farm prices and supportive government policies, the cement sector could turn increasingly attractive on the back of a potential uptick in housing and government infrastructure spending.
Oil prices could play spoilsport here – if global growth stayed firm against our current expectation and if geopolitical tensions flared up, oil prices would start rising again, which in our view will derail India’s recovery by a few months. July macro indicators have softened a bit on a month-on-month basis, which we think is due to the monsoon effect, and heading into the festive season, the macro economy should see an improvement in our base case scenario.
Why do you expect a slowdown in top-line growth in the second half of FY 2023 but an improvement in margin performance?
We expect global growth to weaken further vis-a-vis current consensus expectations and therefore export-driven sectors might face some top-line growth concerns, for example, the Indian IT sector on which we have a negative view. Moreover, a correction in commodity prices may lead to a weaker top line.
However, margins (which were under pressure significantly in the past) should start to see some improvement, driven by lower commodity prices quarter on quarter and price hikes taken in the past. We expect margin pressures to ease in the coming quarters, especially for the auto sector as well as for other consumption-driven companies. In the run-up to the festive season, re-stocking will start and volume growth will lead to better cost absorption.
Do you expect significant weakness in global growth in the coming quarters? Also, what are the key risks that we need to focus on while taking investment decisions?
Our global Investment Committee projects lower global GDP growth compared to consensus expectations, which are likely to see continued downward revisions. For India, the growth outlook is more resilient relative to other large economies, but we believe the Indian economy is not completely immune to a global growth slump.
We maintain our view that the market is already pricing in peak hawkishness, and in the near term expect the market to remain choppy. Equity investors should diversify portfolios, cut leverage and apply more prudent and more defensive strategies because the valuation comfort has faded after an almost 15 percent rally from the recent lows in the past few weeks.
Chinese and European economies are facing renewed growth concerns and the behaviour of the currency market seems too volatile. The US dollar has strengthened against market expectations and the Organization of the Petroleum Exporting Countries (OPEC) is mulling cutting oil supplies, potentially leading to more outflows from emerging markets.
Our key concern is India’s dwindling balance-of-payment situation. Oil should continue to play a very crucial role in determining India’s valuation premium and overall equity market returns from here in the near term.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
