Time Correction Of Indian Stocks May End Soon, Say Analysts

Morgan Stanley says India offers a much stronger relative earnings growth.

<div class="paragraphs"><p>The Bombay Stock Exchange building on Dalal Street. (Photo: Reuters)</p></div>
The Bombay Stock Exchange building on Dalal Street. (Photo: Reuters)

India can exit the time correction in stock markets soon as it remains a stock pickers' market where foreign portfolio investors can reap gains, according to brokerages.

India's absolute returns have stagnated since October 2021 and relative returns have fallen since the end of October last year, according to Morgan Stanley. It is underweight on India among Asian peers as conditions improve in China, South Korea and Taiwan.

But the "relative valuations remain rich and India's low-beta status implies it underperforms an EM (emerging market) bull market", Morgan Stanley said. So the domestic market offers a much stronger relative earnings growth and is also likely to benefit from the troughing of the real rate gap with the U.S., it said.

Rising short-term rates, rich absolute valuations, worsening global liquidity and offsetting institutional flows have probably capped stock indices, Morgan Stanley said. "With each of these now showing signs of turning, it is quite possible that we exit the time correction in the coming weeks".

A positive case seems to be building as India remains a stock pickers' market, according to the brokerage.

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The Nifty outperformed emerging markets peers in 2021 and again from January to October 2022. China reopening, rising interest rates and high relative valuations caused the NSE Nifty 50 Index to underperform the emerging market index by 18 percentage points, according to Jefferies Financial Group Inc.

The Nifty has traded at a premium to emerging markets peers with an average PE premium of 61% over the past 10 years. The strong "outperformance" of India over 2021 to October 2022 drove India's PE premium to a 101% high, Jefferies said.

The Nifty has lost 1.94% so far in 2023 and the Sensex has lost around 0.81% during the period. On Feb. 28, the benchmark indices logged the worst losing streak in nearly four years.

Despite the recent turmoil in the market, FPI flows have been stable over the last month. Relative performance tracker is also pointing towards outperformance ahead, according to Jefferies.

Foreign portfolio investors have shifted their focus on the Indian market and bought equities worth Rs 12,770.8 crore on March 02. This is the largest inflow after Rs 17,205.2 crore on May 6, 2020, and Rs 16,355.3 crore on April 21, 2015.

The Key Risk

Morgan Stanley said a US recession could dampen sentiments in India, while a rise in commodity prices due to China's growth recovery could delay an exit from the rate hikes for the RBI as inflation rises.

The balance of payment remains imponderable with consequences on domestic liquidity, it said.

Stocks are not outright cheap as the market continues to price in mid-teen earnings growth. The most important catalyst in the second-half of 2024 is the market's view on the 2024 general election.

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Jefferies favours domestic companies as a rising private capex and housing cycle would keep growth resilient. The brokerage is overweight on financials, industrials, consumer staples and property. It is underweight on information and technology, pharmaceuticals and energy.

Morgan Stanley is overweight on financials, technology, consumer discretionary and industrials, while it is underweight on all other sectors.

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