Credit Suisse expects the country’s narrow market performance to continue, as the economic uncertainty continues to push institutional investors towards “safe” stocks, thereby resulting in higher market concentration.
“Investors are reacting to the weak economic activity, and the sharp drop in growth has started showing up in revenue growth.
The buys have been most concentrated over the last three years, particularly for domestic institutional buyers,” said the brokerage. Close to 76 per cent of foreign portfolio investors’ (FPIs) holdings are in Nifty stocks, compared to 66 per cent for domestic institutional investors (ratio for DIIs was 56 per cent last year). This has resulted in lopsided performance, driven primarily by select large-and-liquid stocks, with a large number of stocks being 20-30 per cent below their all-time highs, and in some cases even more.
Neelkanth Mishra, co-head (equity strategy) of Asia-Pacific, and India Equity Strategist at Credit Suisse, said: “Policy interventions to get growth back to 6.5 per cent-levels are not politically challenging but it is unclear when they may be undertaken. Efforts to reduce the cost of capital should be the first among these. We expect headline indices to stay elevated on account of inflows, and also because maximum proportion of the market cap is concentrated around stocks that are linked to rising penetration of products/formalisation, market share gains, or global factors.”
Credit Suisse says growth has slowed precipitously over the last six quarters, driven primarily by the slowdown in manufacturing. “Even if private banks continue growing at 20 per cent a year, while NBFCs and the bond market maintaining 15 per cent growth (given that PSU banks may keep struggling), there could be a Rs 20-trillion shortfall in credit availability at the end of five years,” it observed. The brokerage expects indices to stay elevated on the back of steady fund inflows and earnings growth by firms not directly impacted by macroeconomic weakness. It pegs FY21 EPS growth at 12-14 per cent, below current estimates of 28 per cent. “Market performance in CY20 will be affected by how FY22 EPS moves. We expect this to settle at a low-to-mid-teens growth on the reduced FY21 base,” the note said.
Institutional flows are likely to remain steady, according to Credit Suisse. It expects flows into mutual funds via systematic investment plans to continue. FPI holdings, a significant portion of which appears to be longer term in nature, also augurs well for India.
Sovereign wealth funds/central banks and pension funds, for instance, held 22 per cent in Indian stocks at the end of October. A significant part of the foreign MFs’ holding is benchmarked to emerging market, Asian, or global indices and sudden large outflows are unlikely, says the brokerage.
Credit Suisse is overweight financials, telecom, utilities, and metals, with a minor overweight stance on pharma and IT. It is market-weight on staples, and underweight on consumer discretionary, cement, and industrials.