JPMorgan Strategist Explains Why He Raised India's Rating To 'Overweight'

India has the strongest nominal GDP compounding among emerging markets, according to JPMorgan's Pedro Martins Junior.

This is driven by factors such as demographic trends and investments in infrastructure, Martins, chief emerging markets equity strategist and head of Latam equity research, said. "The government has been shrinking and giving space to the private sector, and from a return-to-risk perspective in the sharp ratio, India ranks amongst the best within EM," he told BQ Prime's Niraj Shah.

JPMorgan, in a report authored by Martins Junior, upgraded India's rating to 'overweight' from 'neutral', citing the seasonal impact of Lok Sabha elections and the strongest growth among emerging markets.

The brokerage will use "near-term correction/dip as an opportunity to add and leverage on a positive historical seasonality for general elections," it said in a note.

In the Indian equity market, two noteworthy trends have emerged. First, as China's real GDP growth slows down, India is delivering a stronger GDP than China, Martins said. Second, some pension funds in the U.S. are reallocating their investments, and India is one of the recipients of this reallocation of money.

When investors consider growth opportunities in emerging markets, especially as an alternative to China, they are focusing on four specific countries. India is at the top of the list. The second in line is Indonesia, followed by Saudi Arabia and Mexico, Martins said.

JPMorgan will include the Indian government bonds in its benchmark emerging markets index, starting June 28, 2024.

Indian bonds or fixed-income instruments will be an important benchmark for global investors tracking bonds globally, according to Martins. "Once you include or increase the weight in those indices you attract inflow of money and that could have some tangible benefits."

This could help stabilise the Indian currency, leading to appreciation. It may also lower long-term financing costs for Indian companies. "So currency strength, plus lower cost of debt for the long term, they will be topping out on the structural factors to help Indian companies compound EPS faster," he said.

The brokerage is not constructive on risk assets, Martins said. "At the global asset allocation level, house view remains cautious."

"Key reasons is interest rates moving higher and the elephant in the room are rates in the U.S., short end and long end," Martins said.

The valuation in parts of the global asset allocation markets remain expensive and there are overhang concerns about geopolitical risks, according to him.

The global asset allocation recommendation is to maintain a defensive allocation war model portfolio. "We are underweight on equities and credit versus overweight cash and commodities," Martins said.

"We stay underweight on global equities within the global economic framework because we see a double negative impact for corporates, notably in the U.S."

High inflation rates are negatively affecting pricing power. With the expected low economic growth in the U.S., next year. There will be less volume growth and, additionally there is a double negative impact for households, Martins noted.

"There is concern about the exhaustion of the cushion of the consumer excess savings that were accumulating during Covid...The Fed is trying to do its job to inflict pain into the labor market to create the inflection point. So the road bumps are plenty," he said.

Federal Reserve call is a little bit of a stretch to the bear side, there is no hurry for the Fed to cut rates in the U.S., Martins said.

There is massive under allocation of global funds into emerging market assets and particularly equities, he said.

Emerging market equities are currently undervalued when compared to developed markets, adjusted for the historical discount. There is a growing belief that there are valuable opportunities emerging in other aspects of emerging markets, such as rates and foreign exchange, Martins said.