Credit Suisse cuts Indian equities to underweight from overweight in EM portfolio
Credit Suisse cites a small deterioration in the country's external position, expensive valuations and negative earnings revisions
Mumbai: Credit Suisse has cut its previous 5% overweight stance in India in its emerging markets portfolio to 15% underweight, citing a small deterioration in the country’s external position, expensive valuations and negative earnings revisions.
In a note on Tuesday, it said is reversing its long-standing preference for Indian versus Brazilian equities, shifting to a profoundly contrarian 15% underweight stance on India and 10% overweight position on Brazil within a pan-emerging markets portfolio.
“..We anticipate a steady modest deterioration in the (India’s) external position; Indian valuations are now, in our view, attracting unjustifiable premiums, India’s earnings revisions are the most negative across emerging market," Credit Suisse analysts Alexander Redman and Arun Sai said in a global EM (emerging markets) equity strategy note.
They raised concerns that sustained negative momentum in dedicated emerging market equity fund exposure to Indian assets will result in a sustained medium-term reduction in net (equity) portfolio flows, thus reducing the capacity to grow forex reserves once the basic balance moves into deficit.
In their view, Indian valuations are now attracting unjustifiable premiums.
“As such, we are taking profits on our previous 5% overweight stance on India—in place since 4 December 2013 —although we have been actively reducing our Indian exposure over the past year, most recently lowering our overweight to 5% from 10% on 1 December 2015," they said.
“India trades on a 12-month forward sector-adjusted consensus earnings multiple of 15.3 times at 40% premium to remainder of emerging markets. Over the past 20 years, the relative earnings multiple has only been more expensive than current for just 18% of the time," Credit Suisse said.
They added they are taking profits on Brazil on their former deep 15% underweight stance in place since 1 December 2014.
Since 1 January 2012, MSCI Brazil has underperformed MSCI India by 69% in dollar terms. At an individual country level, Brazil and India’s relative performance since January 2012 against the overall MSCI EM benchmark has been an underperformance of 56% and an outperformance of 41%, respectively, both in dollar terms, the note pointed.
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