India Monthly Outlook
The key question on the minds of investors right now is how far the current bull market will continue without a material correction.
Our global Investment Committee sees tactical indicators such as the CS Global Risk Appetite Index as less stretched than last month. The medium-term outlook for equities is still positive but some degree of caution is warranted in the short term. Within the global context, India’s investment appeal has improved materially, given improved corporate balance sheets, the focus on reforms, record foreign exchange reserves, and a good momentum on tax collections.
This improved outlook is now clearly visible in India’s record-high price-to-earnings (P/E) premium over other emerging markets: The MSCI India trades at a 12-month forward P/E premium of 83% versus the MSCI Emerging Markets Index, compared to the 10-year average premium of 42%. While this high valuation could unnerve some investors, we suggest staying invested in equities, albeit with reduced portfolio risks. We are now moving away from our long-held relative preference for mid-cap stocks, toward a neutral view. We are raising the relative weight of Indian mega caps to neutral as well.
Gradual re-opening of the economy in India
We expect the gradual re-opening of the economy and the consequent impact on corporate profits in the next couple of quarters to keep investors’ interest high in well-managed private banks. The progress of the monsoon in India this year is somewhat slower than expected, and inflation might be an area of concern in the next few quarters. Hence, within the debt market, we are a little conservative, keeping a preference for short- to medium-duration bonds.
India’s exports are starting to pick up nicely and fiscal deficit may not be as bad as feared based on our assessment of the impact the second wave of COVID-19 has caused. The INR therefore may remain range-bound as the headwinds from the US Federal Reserve tapering its stimulus program and from an expected higher inflation rate in the next couple of quarters could offset India’s favorable balance-of-payment situation and improved economic fundamentals. Brent oil price has corrected nearly 4% over the past month and our Commodity team forecasts USD 68/bbl oil in the next 12 months (versus USD 66.5/bbl currently).