The Indian market has outperformed major global markets in the last one year as well as in the past decade. Given the outperformance of large-cap (23 percent) and mid-cap (58 percent) stocks in the past year, brokerage house Investec believes the probability of a correction (10 percent drawdown) in 2024 is high.
In fact, the probability is close to 90 percent, forecasted the brokerage. Investec, however, does not see an imminent crash (over 25 percent decline) as valuation is not excessive, and historical imbalances have been corrected.
"While external factors/geopolitics remain risks, our vulnerability today is lower than in the past. On the macro front, India is likely to structurally resolve its chronic CAD, which will aid the investment cycle as household savings also increase. Our optimism on the private CAPEX cycle is also predicated on a solid increase in corporate profitability - has increased 2.5x to ₹10 lakh crore between FY20-FY23," explained the brokerage.
It continues to remain ‘overweight’ on Industrials, Autos, Financials and Pharma and prefers ICICI Bank, Kotak Bank, Bajaj Auto, and Cipla in largecaps, and Delhivery, Equitas, AngelOne, Policy Bazaar, Exide, and Petronet in mid/smallcaps.
The Indian equity market has consistently outperformed over the past decade as well as in the last one year.
The brokerage informed that in the past decade, the Nifty index has jumped 11.7 percent in dollar terms. Only US markets (up 12.6 percent) have outperformed Nifty in this period. Similarly in the last 1 year, the Nifty index has advanced 20.8 percent versus a 22.1 percent jump in US markets. All other global peers have underperformed the Indian equities in this time period as well, further highlighted Investec.
The brokerage pointed out that in the past 33 years, Nifty has corrected more than 10 percent in 29 years (a probability of 88 percent). However, a correction of more than 20 percent while frequent in 2000s, has already become rare – since 2010, this has happened only once in 2020, added Investec.
Furthermore, it observed that the only market crashes (over 30 percent decline) in the 21st century have their origin outside India – 2008 (GFC), and 2020 (COVID). These crashes (2008 & 2020) are typically the result of a major imbalance accompanied by a massive inflation in valuation.
Both those conditions are largely absent today in India, although we remain exposed to external shocks, noted the brokerage.
"Our risk to external shocks is also going to be better managed, as we calculate that India is likely to become Current Account Surplus: Our economic fragility was derived from running a twin deficit – high fiscal deficit (average general government deficit of 7.8 percent over the past 10 years (FY14-FY23RE)), alongside a current account deficit (average CAD of -1.2 percent over past 10 years). As we model our Current Account forward, we feel confident that India could start running a structural surplus on the current account over the next 2/3 years. Key drivers will be thermal coal sufficiency, chemical exports, and import substitution (net) in electronics," stated the brokerage.
It believes that this will help contain Indian net imports in Goods to $240 billion per annum over the next few years, i.e., import substitution + modest exports, enough to meet growing domestic demand. Given this construct of stable net Goods imports, and growing net Services, the brokerage expects India to become structurally Current Account surplus sometime late next calendar year, even as the Current Account deficit in the interim is comfortably managed through capital flows.
Another key point, as explained by the brokerage, is that interwoven with an improving current account is a recovering private investment cycle, especially in manufacturing. It argues for a private capital expenditure recovery in the country for the past few years, as we witnessed a sharp recovery in corporate profitability.
The brokerage stated that the expectation of an increase in private investment is supported by an improving RoIC profile of BSE500 companies as years of reforms - 1) Bankruptcy code, 2) GST, 3) Corporate tax rate cut, 4) PSU banks reform - meant that capital allocation in India has improved. After years of post-GFC excesses, RoIC bottomed in FY16 at 7.8 percent and has since recovered to exceed 11.1 percent in FY22.
This, Investec believes, is an encouraging sign for incremental investment, as capacity utilisation (as measured by fixed asset turns) is also a couple of years away from its peak. Anecdotally, it sees definite appeal for global procurement to increase in India in sectors like 1) chemicals – India is one of the only two large global chemical manufacturing countries in the developing world (the other being China), and 2) electronic manufacturing.
It continues to prefer investment themes of discretionary consumption and infrastructure creation. Meanwhile, it remains bullish on Industrials, Autos, Financials and Pharma, while ‘underweight’ on Consumer Staples, IT, Cement and Metals.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.
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