There is a potential for renewed outperformance by India in an Asian and emerging market context, according to Jefferies’ Chris Wood.
The valuation differential between India and China has reverted to its “traditional mean after a huge 65% outperformance of the MSCI China over the MSCI India since the end of October 2022 to late January following the China reopening,” Wood highlighted in his latest Greed and Fear report.
This sets up a potential for renewed outperformance by India, most particularly, as dedicated long-only foreign investors are underweight India, the note said.
Indian domestic equity mutual fund inflows have remained positive, with a renewed pickup, said Wood, citing the most recent data. A majority of these inflows continue to come from the systematic investment plan route, where monthly inflows are debited from salaries.
Such inflows are naturally stickier than retail “punters” speculating via derivatives and represent a long-term structural positive for the stock market, according to Wood.
“The domestic demand story in India certainly remains intact to justify the continuing belief in the equity market,” the financial analyst said. Wood pointed out that the loan growth has slowed but still remains solid at 15.5% year-on-year. The confidence of Indian private banks, he said, is reflected in strong growth in operating expenditure.
Meanwhile, the recovery in the Indian residential property market also continues with “satisfactory” housing affordability, despite mortgage rates rising 8.7%, Wood said.
The monetary tightening cycle is nearly done following 290 basis points of tightening since April 2022, with the policy repo rate now at 6.5%, the financial expert said.
Wood, citing the above reasons, concluded that a private sector-led capex cycle is now due given that the banking system is healthy in terms of an eight year low in the non-performing loan ratio.
He added that the corporate sector is unleveraged and profitability is rising in terms of listed companies’ return on equity. “Any pickup in private sector capex will be on top of the significant capital spending undertaken by the Modi Government in recent years,” Wood added.
“In this respect, the government, in the budget announced on Feb. 1, resisted the temptation to be populist in a pre-election year.”
