Christopher Wood raises allocation in Indian equities
In his latest note to investors, GREED & fear, Christopher Wood, global head (equity strategy) at Jefferies, said he has increased allocation to Indian equities in his Asia Pacific ex-japan relative-return portfolio by one percentage point and added two percentage points to the existing investment in HDFC in the Asia ex-japan longonly portfolio.
Wood feels HDFC’S valuation remains attractive at 2x 12-month forward adjusted book, compared with a fiveyear average forward price-tobook (P/BV) ratio of 2.6x.
“The home financing story is more straightforward given the surge in affordability courtesy of lower interest rates and the prolonged correction in residential property prices. HDFC is the standout name in this regard and looks poised to take significant market share as more distressed lenders in this space have been forced to curtail activities, which is why GREED & fear has increased its weighting from 4 per cent of the Asia ex-japan longonly portfolio to 6 per cent,” Wood wrote.
Among Indian stocks, Wood also holds Reliance Industries (RIL), Maruti Suzuki, SBI Life Insurance, ICICI Lombard General Insurance, DLF, and Cipla in his Asia ex-japan thematic equity portfolio for long-only absolute-return investors.
Analysts at Morgan Stanley are treading with caution on the financial sector and suggest it could lose leadership status in a new bullmarket, given an over-owned position. “Non-banks face significant growth slowdown. We think a stimulus package is essential, but the sector ’s performance could narrow to a handful of strong banks. We are sellers of a rally in financials,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley, in a note coauthored with Sheela Rathi.
Buy on dips
Morgan Stanley believes recent policy measures of the government will help attract foreign flows into equities. However, the market’s performance in the near-term is tied to global factors, which they feel, will keep them choppy. India, Morgan Stanley said, needs to continue to deliver policy that lifts its potential growth in of market participants’ eyes.
From the lows of March, the Sensex and the Nifty50 have already risen about 53 per cent each and have outperformed emerging markets (EMS) since April. “We remain buyers of any correction that stocks may offer, as valuations are attractive relative to macro aggregates. The broad market will likely outperform, consistent with our theme that this is a stock picker ’s market. Prefer cyclicals over defensives. The themes we like include agriculture, manufacturing and early cycle rate plays,” Desai and Rathi said.
As their base case, they expect the Sensex to be around 37,300 by June 2021, nearly 6.5 per cent lower than the current level. “Our June 2021 target implies a Sensex forward P/E multiple of 17x and a trailing P/E of 23.6, a 15 per cent discount to the 25year trailing average of 19.7x, given that FY21 earnings are likely to be very depressed,” Desai and Rathi wrote. In their bull (30 per cent probability) and bear case (20 per cent probability), Desai and Rathi expect the Sensex at 45,000 and 28,000 levels, respectively.