The outperformance of Indian equities in recent quarters has made midcap stocks valuations expensive, and there is room for further correction, global brokerage firm Jefferies says in its latest report, GREED & fear.
The obvious risk of further corrections remains greatest in the mid-cap space as the Nifty MidCap 100 Index trades at 30.7x one-year forward earnings, compared with 19.7x for the Nifty, writes Christopher Wood, global head of equity strategy at Jefferies in the report.
According to Wood, there is a certain surprise that the stock market has not fallen more in recent days, most particularly given that the market has been driven by surging retail investor inflows in recent months. He adds that if there is definitely a risk of renewed share price declines, there is one major positive to be aware of from a flow of funds perspective.
“Foreign investors will view any significant correction as an opportunity to add since a combination of India’s outperformance in recent quarters and high valuations, most particularly in the mid-cap space, has meant that most dedicated emerging market investors are no longer overweight the market,” he says.
The report highlights that foreign investors have been net sellers of Indian stocks year to date, paring a net $3.98 billion of Indian equities so far in 2024, after buying a net $21.4 billion in 2023.
Wood says there will be a temptation for investors to tilt the portfolio more towards consumption plays, relative to investment plays, on the view that the incoming government will focus more on populist measures whereas a feature of the past ten years has been a fiscal deficit driven by spending on physical infrastructure rather than transfer payments. “The obvious possibility here is measures to revive the rural economy,” he adds.
Wood believes that GREED & fear’s long-only India portfolio is structural in nature and the base case here remains that India is in a property and capital spending up cycle which will continue.
Citing the 2004 shock defeat of the BJP in Lok Sabha Elections and the Congress-led government’s benefit from the structural reforms inherited from late Atal Bihari Vajpayee-led NDA government, the report notes that “if the repeat of that pattern is the base case, the election result has probably reduced the prospects of state-owned enterprises (SOE) reform and public sector divestment”.
“For this reason, GREED & fear will shave the weighting in public sector companies in the long-only India portfolio. The weightings in ICICI Bank, State Bank of India, REC Limited and Coal India will be reduced by one percentage point each, while an investment in PolicyBazaar will be introduced with a 4% weighting,” the report highlights.
“As for the Asia ex-Japan long-only portfolio, the investment in JSW Energy will be increased by one percentage point by shaving the investment in State Bank of India,” it adds.
From a macro standpoint Jefferies continues to look for real GDP growth in the 6.5-7.0% range and annualised earnings growth of 16% in the FY24-26 period.
(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)
