Here's Why CLSA's Chief Equity Strategist Is Overweight On India
Credit impulses improving earnings outlook and lower oil prices are expected to buoy up Indian markets.
Alexander Redman, chief equity strategist at CLSA, was underweight on India up until last year, but he is now overweight on the country.
"If you look at where credit impulse is going, you have a good handle on where the Nifty 50 composite is going," Redman said on the sidelines of the 26th Citic CLSA India Forum 2023 in Mumbai.
The forecast for India's credit extension turned into an impulse. The change in credit to the gross domestic product shows a pretty buoyant equity outlook, according to Redman.
"Secondly, we are also out of India's pain threshold for energy prices, with oil at well below $100. The rupee is a constant source of concern as a foreign investor," he said.
Alexander Redman, chief equity strategist at CLSA. (Source: LinkedIn account)
Redman pointed out that there are two reasons to be slightly more optimistic—cheaper energy prices that are filtering through to a reduction in the current account deficit and India's inclusion in the JP Morgan Bond series next year, which can result in anywhere close to 1% of the GDP net inflows.
"I think what you are now beginning to (see) is India emerge from an entire decade of where the compound annual growth rate of the trend dollarised earnings was zero," he said.
Investors are not comfortable paying growth premiums for a market where the dollar growth rate for a decade was zero. The country is now emerging from that, according to Redman.
If economists are right, then maybe about 15% earnings-per-share growth this year and about 13% EPS growth next year is right. It is due to the fit between nominal GDP growth and EPS growth, which, on a quarterly basis, is quite faithful in India because it is a very domesticated market, Redman said.
The key question is whether foreign investors are exhausted because of the significant reclassification of assets from China to India and elsewhere, he said.
Redman underscored that there is still a propensity to unwind in China. "That money has to find a home elsewhere."
"What will really move the needle here, though, is engagement from global funds," Redman said. He explained that it's the fresh crossover money coming that would be really felt.
Most dedicated emerging markets' money is already overweight in India, and there is only so much further they can go. The stumbling point remains valuations. They are a little bit easier to digest this time than a year ago, he said.
India attracts higher-than-normal premiums currently for two reasons. The 'it's-not-China' premium that investors are willing to pay up for and, secondly, growth and profitability metrics that were disappointing for so long are looking up now, according to Redman.
India's central bankers might not have full jurisdiction. The country still runs a significant current account deficit, and cutting rates ahead of the US Federal Reserve might not be a sustainable strategy, Redman said.
He asserted that the Lok Sabha election next year is not expected to be a nail-biting event, with global investors assigning a high probability to a continuation of the current regime, even if it may have a lower mandate.
