Indian Markets Entering Consolidation Phase, Says Jefferies' Chris Wood

The base case includes further consolidation for the Indian stock market before the commencement of the next leg up, according to Jefferies' Christopher Wood.

The Nifty has experienced a 3.1% decline from the record high it reached on July 20. Still, the positive point and a major reason to add on any pronounced pullback is mounting bottom-up evidence of a capex cycle, Wood said in his GREED & Fear note on Aug. 24.

The Indian stock market has been due a bit of a breather, considering how GREED & Fear's Indian portfolio appeared like a vertically ascending rocket in the early part of last month, he wrote.

This situation can be attributed to the significant presence of interest rate-sensitive assets within the portfolio, with a notable 60% allocation towards financial and property stocks. Over the recent months, the Indian stock market is celebrating the assumed end of monetary tightening, the note said.

An important piece of data to highlight is that cement companies are currently demonstrating the most robust volume growth since the first quarter of the fiscal 2022, running at an estimated 15-16% year-on-year in the first quarter of FY24, the note said.

The note cited Jefferies’ India building materials Analyst Prateek Kumar's observations that many cement companies expect double-digit demand growth for the industry in FY24. "Prateek also noted that if cement demand grows at double-digits in FY24, which is likely, it will be the first time in the past three decades that India cement demand will have grown double-digits for two consecutive years," Wood said in the note.

As for cement prices, they have risen by 14% over the past four years.

The other near-term issue is that July’s headline CPI came in well above consensus at 7.4% year-on-year, which is also above the Reserve Bank of India's comfort zone of 6%, the note said.

The main culprit was food inflation, which surged from 4.5% year-on-year in June to 11.5% year-on-year in July, the highest level since April 2020. Still, core inflation remained at 4.9% year-on-year in July, down from 5.1% year-on-year in June and the lowest level since April 2020, it said.

The money markets are still not expecting any more rate hikes. The RBI has kept the policy repo rate unchanged in the past three monetary policy meetings, after raising it by 250 basis points since May 2022 to 6.5% in February.

Gross fixed capital formation as a percentage of Indian nominal GDP continues to look encouraging, according to the GREED & Fear note. The gross fixed capital formation to nominal GDP ratio has risen from 27.3% in FY21 to 29.2% in FY23, the highest level since FY19. The next GDP data for Q1 FY24 will be released on Aug. 31.