Markets may be lacklustre in near term, warns Credit Suisse’s Neelkanth Mishra
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Mumbai: Valuations of key indices of Indian equity markets were higher than current levels for only 4% of the times over the last 20 years, making them stretched as earnings remain tepid and economic indicators stay weak, said Neelkanth Mishra, managing director, equity research at Credit Suisse’s Indian securities arm.
India’s benchmark equity index, the 30-share Sensex, trades 17.64 times one-year forward P-E (price-to-earnings), at a premium over its five-year historical average of 15.58 times, Bloomberg data showed.
“These are very elevated levels in absolute terms versus India’s own history,” Mishra said, warning that markets would be sluggish for the next few months.
“If one were to time the market for quick gains, I am not too gung-ho about the market right now. It will be lacklustre over next 3-4 months, but from a 18-24 months’ perspective, markets look good,” Mishra, who is also the India equity strategist at Credit Suisse Securities (India) Pvt. Ltd, said in an interview on Monday.
However, on a relative basis, as compared to global equities, Indian markets are still “okay”, Mishra said.
He is overweight on consumer discretionary and staples, but said he went underweight on the IT sector 3-4 months ago.
Credit Suisse was also underweight on capital goods and industrials, and state-run banks, while it upgraded metals earlier in the year, and the likes of oil marketing companies, private banks and select NBFCs (non-banking financial corporations).
MSCI India Index traded at 19.02 times one-year forward earnings, compared with MSCI World Index trading at 17.46 times.
Sensex is up 7.53% year-to-date, and has added 22.37% from the 2016 lows seen on 11 February.
“I think this run-up has been really steep, and is not yet been backed by very solid earnings. While we expect economic momentum will pick up very strongly in the next two years, the economic indicators are not going to be that robust over the next few months,” added Mishra.
Mishra pointed out that commercial vehicle sales, cement sales and power generation were slowing down, and even oil volumes were pretty weak in June.
“We have seen very weak commentary coming in from FMCG (fast moving consumer goods) space, particularly in the mass market segment, at the low end of the income spectrum,” said Mishra.
Last month, top officials at companies such as Dabur India Ltd and Hindustan Unilever Ltd had expressed concerns on a tough economic environment characterised by demand slowdown, intensifying competitive pressure, and hinted that the market would be muted in the near term.
“All the indicators are coming together and saying that things aren’t looking very good as yet,” added Mishra.
“We were constructive starting last year in November, and were saying the economy is reviving and at that point no one wanted to believe us. By March-April, the whole world wanted to believe that everything is gung-ho and we were saying things are going to slow down for a few months. It did start to slow down and I don’t think we are done yet,” Mishra warned.
According to Mishra, investors were becoming very uncomfortable with the fact that earnings upgrades are not coming through yet, and added that most of the upgrades will happen in the second half of the current financial year.
He expects economic activity to start looking up, starting November or December, pointing that benefits of pay commission cash flows will be evident in the coming months.
“Also, harvests will come through, and we will see government expenditure kicking off. A lot of spending on national highways and roadways will also start showing impact in the second half of the next financial year,” he added.
While Indian equity markets have been one of the top recipients of flows over the last decade, Mishra pointed that over the last few months, they attracted flows, as a part of the larger emerging markets.
“India had been overweight for most EM (emerging market) funds for a long time—a place to hide. Now that the risk appetite is coming back into equities, India is acting like a low-beta market. This is why the flows into our markets aren’t as strong as for other EMs,” explained Mishra.
However, given that India’s nominal GDP (gross domestic product) can be growing at 11-12% in the next 5-10 years, the visibility and comfort is definitely there for investors, he added.
Meanwhile, the fear of outflows from oil-linked sovereign wealth funds seemed to be receding.
“The fear earlier was that they would be forced to sell a lot of their EM holdings in order to keep their budgets balanced. They probably did that initially, but over a period of time, they figured that perhaps they can borrow from the market to keep their economies running,” Mishra said.
Mishra does not expect the implementation of GST (goods and services tax) to happen before April 2018, but taking into account the political perspective as well, April 2019 seemed to be more likely.
“There is likely to be chaos in the initial stages of implementation and it could lead to potentially many disputes or anomalies. Then there is the political angle: if by implementing GST, prices of 100 things come down, but five things go up, those five items can be flagged by the opposition as an implementation mistake by the government,” he said.
“Getting the industries, states and centre on the same page, is a complex task and a lengthy one too,” added Mishra.