Edelweiss: Look past India polls; stocks to climb

MUMBAI: While investors in India are worried about upcoming elections and threats to economic expansion, it’s not yet time to lighten up on equities, according to Edelweiss Financial Services Ltd.

The polls are mere “interruptions” that wouldn’t disrupt the nation’s economic structure or business cycle, analysts led by Aditya Narain wrote in a note earlier this week.

Political uncertainty is emerging as the key risk as Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) faces elections in five states before a national vote to be held by May.

Some opinion polls are predicting a win in Rajasthan for the main opposition Congress, and a close contest in Madhya Pradesh and Chhattisgarh – both of which are currently ruled by the BJP. The results, due on Dec 11, may determine how Indian assets end 2018.

Edelweiss is urging investors to focus on the second half of next year – a period that may see optimism return and the business cycle kicking into high gear. The NSE Nifty 50 Index may end 2019 at 11,800, about 11% higher than Tuesday’s close, the brokerage said.

“Don’t split hairs on India’s macros, earnings and valuations – split 2019 into two halves,” the analysts wrote. “The second half should be a smoother ride.”

Expectations of further rate increases by the Reserve Bank of India have weakened as the country’s retail inflation in October eased to a 13-month low and oil – India’s top import – slumped into a bear market.

The rupee’s 15% decline against the US dollar this year is “probably an over reaction,” and the cooling in crude prices paves the way for a rebound, the brokerage said.

Edelweiss recommends investors tilt their portfolio toward defensives – large-cap banks, consumer staples, technology firms and drugmakers – and keep an eye on opportunities the increased volatility may throw up in the run up to general elections.

There’s one caveat to Edelweiss’ 2019 outlook. A scenario where an alliance of regional parties take power would compress the valuation premium to other developing markets, the brokerage said.

The S&P BSE Sensex trades at 20 times oneyear forward earnings, versus 11.5 times for the MSCI Emerging Markets Index.

“An unstable government shouldn’t disrupt the business cycle – but valuation generosity it will,” the analysts wrote. — Bloomberg