Jitendra Gohil of Credit Suisse
In relative terms, Credit Suisse Wealth Management remains neutral on India equities but does not expect the market to underperform its emerging market peers, Jitendra Gohil shares in a discussion with Moneycontrol.
The overarching stock-picking theme for Credit Suisse discretionary portfolios is to look for companies with margin expansion potential with some consumption-related names such as gas utilities, footwear, FMCG, and tile companies that might benefit from a lower commodity price environment in 2023, the director of Global Investment Management says.
Jitendra, an equity market expert with over two decades of professional experience in the capital markets believes that India is one of the cheapest manufacturing destinations with a large domestic market.
“We continue to recommend companies that benefit from the “China Plus One” strategy of global companies, as well as companies that are setting up manufacturing capacities to offset import requirements and promote exports in the sectors such as defense and chemicals,” Gohil says.
The RBI has the headroom to go slow on its rate hike path, given the relatively softer GDP print for H1 FY2023, fall in commodity prices and lead indicators suggesting a slowdown in the Indian macro economy.
What would be the biggest supportive factors for Indian equities in 2023?
From a growth perspective, Asia seems better positioned in 2023 than the West and hence the flows should remain reasonably supportive for emerging markets (EMs), especially when the US dollar is starting to see some weakness, in our view.
Within Asia, we expect India’s growth to remain relatively resilient. The weight of Indian equities in the MSCI EM Index has gone up materially at a time when FPI holdings in Indian equities are at the lowest level in a decade. Hence, passive flows into India should remain supportive of equities in 2023, in our view.
The biggest headwind for India this year was higher global inflation and the steep rise in interest rates. However, in 2023 as the base catches up – the Ukraine-Russia war started in February – and weaker global growth starts to bring down inflation, Indian corporates may start to see margin expansion in the next few quarters.
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In terms of corporate fundamentals, India’s banking system is relatively resilient and corporate leverage has come down materially, which should help to weather the difficult international macro backdrop in 2023. We expect the government to keep the focus on infrastructure growth and execution, especially ahead of the general election in 2024. Hence, next year, we expect government policies to be supportive for the equity market.
Do you think significant amount of foreign money is piling up to establish presence in India through factories and partnerships?
Not just India but other Asian and Latin American countries are also going to experience favourable FDI flows as global companies continue their supply chain de-risking initiatives and move away from overdependence on China. With significant investments in infrastructure, several business-friendly reforms and a stable government at the center, India has certainly emerged as an attractive destination for foreign investments.
India is one of the cheapest manufacturing destinations with a large domestic market. Hence, we continue to recommend companies that benefit from the “China Plus One” strategy of global companies, as well as companies that are setting up manufacturing capacities to offset import requirements and promote exports in the sectors such as defense and chemicals.
What do you broadly expect from Reserve Bank of India’s December policy meeting?
The market is anticipating a 35-50 bps rate hike in the coming policy meeting of the central bank. The risk is that the RBI may deliver dovish policy and probably the market has started pricing this in. As we have said in the past – and it still holds true – India can tolerate up to 7-8 percent inflation based on our analysis, and currently CPI inflation seems to be heading toward 6 percent levels.
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The RBI has the headroom to go slow on its rate hike path, given the relatively softer GDP print for H1 FY2023, fall in commodity prices and lead indicators suggesting a slowdown in the Indian macro economy.
We continue to believe that higher growth is paramount for India’s financial and social stability. Higher growth and higher tax collection are needed for job creation, infrastructure development and to support the government’s welfare schemes. Hence, the RBI may continue to focus on growth as well. Specifically, in the upcoming policy, we expect the RBI to announce some liquidity measures. The credit growth is now touching high-teen levels while deposit growth is lagging.
Do you see growth outlook softening in India in the next 12 months?
Growth outlook has already started to show signs of softening as higher interest rates and weaker global growth are weighing on business sentiment. Pent-up demand may support growth a couple of months more, but weaker exports and higher interest rates should eventually hurt growth in India as well.
Nevertheless, we still believe the medium-term growth outlook for India is very encouraging and the economy should remain in a sweet spot in the years to come, thanks to the economy’s relatively strong macroeconomic fundamentals.
Do you think the inflation may have peaked in most of developed economies including US, and also in India?
Inflation prints have started showing signs of peaking and may get base support, especially from February onward; however, it may remain uncomfortably high and sticky globally. Geopolitical tensions have not abated yet and once China opens up from its strict COVID lockdown, the inflation print may start to see some upward pressure.
Hence, one has to keep a close watch on global growth, China re-opening, food shortages, and OPEC’s decisions on production cuts, if any. Hence there are too many moving parts. Within India, food inflation should start to moderate. This coupled with a stronger INR (as we have seen in the past few weeks) and a fall in international oil prices should help inflation print.
After significant run up in last several weeks, do you think India is still relatively attractive at these levels?
In relative terms, we remain neutral on India equities (we do not expect the market to underperform its emerging market peers). We believe the valuations are stretched but nonetheless supported by the strong fundamentals of India’s economy and corporates.
While the Nifty50 Index is at all time high levels, there are several leading companies in their respective sectors trading at 52-week lows due to margin pressure and weak demand conditions. Hence, in a broader market, there are enough opportunities for sector rotation, in our view.
What are the themes to look forward to going into the next year (2023)?
The overarching stock picking theme for Credit Suisse discretionary portfolios is to look for companies with margin expansion potential, e.g. some consumption-related names such as gas utilities, footwear, FMCG, and tile companies that might benefit from a lower commodity price environment in 2023.
The banking sector should continue to see NIM (net interest margin) and ROE (return on equity) expansion and hence despite the recent rally, we continue to like the sector. Once the liquidity conditions start to improve in the domestic market, some of the well managed NBFCs including gold financing companies could start to perform as their valuations are currently at a depressed levels.
We continue to like stocks that will potentially benefit from the “China Plus One” strategy, i.e. stocks linked to export promotion and import substitution, including defense and chemicals.
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