Mumbai: After months of serial downgrades, foreign brokerages may start recommending Indian stocks again as a sharp drop in oil prices is expected to reduce the pace of inflation and lift the outlook on equity.
CLSA Asia Pacific, one of the top five foreign brokerages operating in India, has already recommended increasing the weightage on Indian stocks by a percentage point in the portfolio allocation for the region—from 8% in July to 9% this month.
“Indian stock markets have become, in the short term, a high beta bet on where oil is heading,” said Christopher Wood, Hong Kong-based chief equity strategist at CLSA Asia Pacific, in his latest Greed and Fear report, which is popular among institutional investors.
If more foreign brokerages join CLSA in raising the India weightage, it could result in their clients investing more in India to adjust their Asian or emerging market portfolios.
Foreign institutional investors, or FIIs, the main drivers of the Indian markets, have bought almost $380 million (about Rs1,600 crore) more worth of stock than they sold so far in August. Until mid-July, FIIs had sold $6.8 billion more of stocks than they bought, after investing more than $17 billion in 2007.
“Global investors were negative on Indian stocks because of the macro worries,” said Deepak Lalwani, India-specialist director of London Stock Exchange broker Astaire and Partners Ltd. However, after the recent fall in oil prices, Indian stocks look attractive despite relatively high valuations, Lalwani said.
According to Wood, the asset allocation recommended for dedicated equity investors continues to be to “get out of commodity and cyclical-related stocks” and “get into interest-rate sensitive stocks”, which will be viewed as beneficiaries of a weaker oil price.
Even though inflation continues to rule at the highest rate since the current series based on the Whole-sale Price Index started in 1995, and the rise in the central bank’s policy rate by 1.25 percentage point to 9% since April, the outlook on the interest-rate trajectory is slowly changing with the softening of oil prices.
International crude oil prices, which rose to more than $147 a barrel in July, were down to $115.15 last week. The Dow Jones Industrial Average, a key stock index in the US, rose more than 300 points in Friday’s trading following the fall in oil prices. On Monday, the Indian market could open on a strong note, analysts said.
India’s bellwether stock index, the 30-stock Sensex, had rallied some 20% from a low of 12,500 levels around mid-July to around 15,000 last week. After gaining more than 45% for two consecutive years, the Sensex fell some 37% this year before staging the rally.
“India is the obvious biggest beneficiary (of falling oil prices), which is why it is not surprising that it has rallied the most so far this quarter out of all Asian markets,” Wood said.
A significant part of the outflow from Indian equities was channelled to commodity-linked stocks in Brazil, Russia and other emerging markets.
However, the reverse flow started after the fall in oil prices, which has helped easethe scare of high inflation, said analysts.
“Inflation, to be sure, is the number one bugbear of investors in Asia,” said Mark Mathews and Daniel Casali, Asia strategists at Merrill Lynch & Co., in a late-July report.
Merrill is underweight on India by 70 basis points, as it recommends allocation to Indian equities to be that much less than the weightage of India on the MSCI index. One basis point is one-hundredth of a percentage point.
HSBC Holdings Plc., one of the largest FIIs in India in terms of equity assets under management, too, is not bullish on India yet. It recommend to its clients to remain 60 basis points underweight on India, in its latest equity startegy report in July by Garry Evans.
Most foreign brokerages, including CLSA, peg their regional portfolios to the MSCI AC (all country) Asia ex-Japan Index, which tracks markets in China, Hong Kong, India, Indonesia, South Korea, Malaysia,Pakistan, the Philippines, Singapore, Taiwan and Thailand.