Multinational brokerage CLSA has turned constructive on Indian equities after a bearish stance for nearly 18 months. Analysts led by Vikash Kumar Jain said the market has likely crossed the "maximum pain" point related to geopolitical risks, particularly the Iran war.
Investor sentiment has reached extreme bearish levels while valuations have slipped below long-term averages, creating a more balanced risk-reward profile for Indian stocks. This shift follows a period in which CLSA's downside-protection strategy helped its focus portfolio outperform the benchmark Nifty 50 index by 6 percentage points in the previous quarter, analysts said in a note.
Drawing parallels with past crises such as the global financial crisis, demonetisation, the Covid shock and the Russia-Ukraine war, analysts said market inflection typically occurs shortly after the worst-case scenario begins to fade. A two-week ceasefire between the United States and Iran is a "pivotal signal" that the probability of further escalation has reduced, even though volatility may persist during negotiations.
Valuations and positioning now support a contrarian case. CLSA's proprietary India Bull-Bear Index has dropped to just 1% bullishness, a level last seen during extreme stress periods such as 2008 and 2020, historically strong buy signals. While valuations are not as depressed as during those crises, Indian equities are trading below 10-year averages.
CLSA estimates a 12-month downside of 7-14% in a bear case for the Nifty versus 20-35% upside in a bull case, suggesting favourable asymmetry. The blue-chip index has corrected 9.7% from its all-time high hit on Jan. 2 in the midst of multiple headwinds including the Iran war, trade uncertainties and impact of artificial intelligence on software exporters.
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On the macro front, CLSA expects crude oil prices to remain elevated above pre-war levels for a few months, likely stabilising in the $80-90 per barrel range due to lingering supply disruptions and restocking demand. This could keep inflation and bond yields somewhat elevated, although CLSA does not anticipate rate hikes from the Reserve Bank of India, given constrained fiscal space. Globally, a post-conflict environment could weaken the US dollar, revive capital flows into emerging markets and ease pressure on the rupee, which would be supportive for India.
Alpha Generation Stock Picks
Reflecting this improved outlook, CLSA is shifting its portfolio strategy from capital protection to alpha generation. The brokerage will exit information technology in favour of defence.
It will trim positions in Bajaj Auto Ltd. and Mahindra & Mahindra Ltd. and expects better post-war setup for Vedanta Ltd. over UltraTech Cement Ltd.
Tata Power Co has replaced the defensive counter of NTPC Ltd. and Bajaj Finance Ltd. over IndusInd Bank Ltd.
"We raise overweight on financials and cut IT overweight by swapping Tech Mahindra for HDFC Bank. We continue to hold ICICI Bank, SBI, ONGC, Tata Motors (CV + PV), Infosys, DMart," the note said.
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