2020 May See Inflection Point In Risk In Indian Market: Credit Suisse

New Delhi, December 19: Despite continuing economic slowdown in the Indian economy, Credit Suisse expects headline indices to continue to stay elevated, driven by steady fund inflows and earnings growth from firms that are not directly hurt by domestic macroeconomic weakness but benefit from factors such as rising penetration of products and market share gains.

Credit Suisse says the preference remains for safety and quality, but 2020 may see an inflection point in risk.

In its view policy interventions to get a growth rebound to 6.5 per cent levels are not politically challenging, but it is unclear when these actions may be taken.

“We expect headline indices to rise, as most of market cap is in stocks linked to rising penetration of products/formalisation, market share gains, or global factors. FY21 EPS growth could still be reasonable at 12-14 per cent (currently 28 per cent); the course of FY22 estimates would drive markets in CY20: this too may settle in low-teens. Narrow market performance should continue at least till mid-year as uncertainty stays high, but we must start reducing concentration risk. We stay overweight financials (SBI, ICICI, ICICI Life), telecom (BRTI), utilities (PGRD) and metals (TATA), minor overweight on pharma (DRRD, LUPN) and IT (TECHM), market weight on staples and underweight discretionary, cement, and industrials,” the report analyses.

“Even as de-stocking ends in some sectors, driving some stabilization in the Indian economy, pro-cyclical forces in credit, fiscal and sentiment may still create downside risks. In our view, policy interventions to get a growth rebound to 6.5 per cent levels are not politically challenging, but it is unclear when they may be undertaken: efforts to reduce the cost of capital should be among the first of these. We expect headline indices to stay elevated driven by inflows, and as most of the market cap is in stocks linked to rising penetration of products/formalization, market share gains, or global factors,” says Neelkanth Mishra, Co-Head of Equity Strategy, Asia Pacific and India Equity Strategist at Credit Suisse.

The sharp growth slowdown of the last six quarters has been led by industry, with all of manufacturing, mining and construction slowing. This has been exacerbated by de-stocking due to monetary tightness. The most striking example is in the automotive sector, where the decline in sales to the channel was far in excess of the decline in final consumption. The double-digit decline in power demand in October-November was likely due to cuts in production to respond to excess inventory at the end of the holiday season. This trend is likely to stabilize in the coming months, the report states.

The report, however, states while inventory adjustments end naturally, some pro-cyclical factors could prolong the slowdown, including 1) Weak nominal GDP growth (at a two-decade low) could drive further tightening of credit conditions; 2) Central government spending, which has been elevated so far, can slow sharply given the tax shortfall. A slowdown in taxes could also hit state government spending; 3) Sentiments, both for investment and consumption appear to be weak, as can be seen in the weak growth of Gross fixed capital formation (GFCF), and a decade-low on the consumer sentiment indicator.

It says while meaningfully below the peak, trailing 12 months equity inflows has remained substantially higher than we have seen historically. The number of retail equity portfolios has also been growing in double-digits.

While discretionary flows have been volatile as expected, systematic investment plans (SIP) flows have been stable over the past year after a remarkable surge in the preceding years.

“We expect SIP flows to continue, but there are risks to this view: 1) several SIPs have been on small/mid-cap stocks and the returns over the last five years have been quite modest compared to Nifty returns; 2) a slowing economy slows incomes and thus savings.”

However, Credit Suisse believes as fixed-deposit rates continue to decline, distribution of these products continues to expand, steady inflows into SIPs should continue.

“We expect narrow market performance to continue for now, as economic uncertainty continues to push funds into the “safe” stocks, resulting in higher market concentration. Market performance in the coming year though would be affected by how financial year (FY) 2022 EPS moves: we expect this too to settle at a low to mid-teens growth on the reduced FY21 base,” the report adds.