Apr 19, 2012 04:09 PM IST | Source: CNBC-TV18

Neutral on India with buy on dips strategy: Credit Suisse

Sakthi Siva, head of Asian equity strategy at Credit Suisse, has a nuetral view on Indian equity, but advices a buy on dips strategy.

Going with the historical trend, Sakthi Siva, head of Asian equity strategy at Credit Suisse, says equity markets may see a slight correction in May. “Every time there is a market correction or a dip, we are happy to recommend buying on those dips,” she added.

Speaking exclusively to CNBC-TV19, Siva says that the easing policy most central banks are adopting will support risk assets, and therefore the direction for Indian equities is up.

However, she says that India has dropped out of the top four cheapest markets in Asia due to its 25% rally since the beginning of January. “India has put on about 25% in US dollar terms in terms, so has since dropped out of the cheapest four club as a valuation model,” she explained.

She further adds that they currently have a neutral call on India, but with a buy on dips strategy.

Credit Suisse’s top picks from Indian equities currently is Tata Motors. “It still ranks as the cheapest stock on our valuation model,” said Siva. Tata Steel and Reliance Industries also feature on their buy list.

Below is an edited transcript of her interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: What did you make of RBI’s action and what is your call on India as a market now?

A: Our theme for this year has been don’t fight the central banks, by which we mean that inflation is slowing and that gives central banks a room to lower rates, not just in India but in global emerging markets. This morning we had Brazil also cut interest rates, so India actually joins Brazil, Thailand, Indonesia, Philippines and several other markets like China as well in terms of cutting interest rates.

The main reason why we believe there is scope for further rate cuts is inflationary slowing.  If you look at emerging markets as a whole, inflation peaked at 6.5% and we are now running at about 4.5%. If you look at the two recent months’ inflation in non Japan Asia, it is actually running at closer to 2%.

In terms of India specifically, if you look at previous periods where the RBI has cut interest rates, the Sensex has tended to rally except during recessions. We are not looking for recession, so we still think the direction in markets is up.

Q: January and February saw a terrific risk on trade across the world. Do you think we are still in that phase because that’s important in determining what kind of liquidity tailwinds we get for emerging markets in Asia?

A: I think there are two competing forces for emerging markets and global equities. As I mentioned, one is our theme of central banks easing policy, particularly in EMs, which we think is obviously supportive. But on the other side, we still have the concerns on Europe in terms of Spanish bond yields. One of the indicators that we watch, which we think was a key driver last year of the weakness in the market, is the Euribor spreads which is our proxy for potential contagion to the financial system.

So I think there are two competing forces at this point in time and as a result our call is not to chase the rallies and buy the dips. I think the concerns in Europe will probably persist for a while, so every time there is a market correction or a dip we are happier to recommend buying on those dips.

Q: Do you see the possibility of another 5-8% kind of dip that you would like to buy in markets like India and other Asian markets in the next 2-3 months because of any easing of global risk appetite or do you think it’s prudent not to wait for such a dip?

A: We are looking for a small dip; it’s always difficult to call the dip and the size of the dip. As you know, we are coming towards the end of April and there’s always this sell in May thesis. But we are not looking for the kind of dip that we saw last year. Last year, from May to October, we had a 15-20% dip in markets but we think there are a lot of things that are different. The concerns about Europe severely spiked the Euribor spreads from 40 to around 100 bps, and as I mentioned that’s our proxy for contagion.

Secondly, last year at this time central banks in Asia were still tightening. Now, as I mentioned, we have central banks easing. Thirdly, valuations were actually more stretched. We have a trading at 2-2.1 times book whereas today we are trading at 1.7 times, so we are about 15% cheaper than last year and then

Fourthly, if you look at May of last year, we actually had quite a lot of foreign investor buying. So to some extent,you could argue we were overbought whereas despite the liquidity tailwinds the net foreign buying on a rolling 12 month basis was more of a neutral factor at this point in time. So our call is a dip but a small dip, not a big correction.

Q: You have mentioned in your report that India is now dropped out of your cheapest four club. Is there a target that you are working with for this market and tactically what's the position on India as a market itself?

A: Yes we tend to favor markets that are in the cheapest four club. India actually joined the cheapest four club on January 3 and we upgraded India on the back of that call. But fortunately or unfortunately, India then put on about 25% in US dollar terms in terms, so as a valuation model it has since dropped out of the cheapest four club. So we are probably more neutral on India at this point in time.

But as with other markets, we would prefer to buy India also on the dips. So our view is when central banks are easing, the trend is generally more up and if you do get a small dip we are suggesting buying on dips.

We continue to like three stocks in particular, and these were the stocks that we added back on the January 3 when we upgraded India. They are Tata Motors, which still ranks as the cheapest stock on our valuation model, and we also like Tata Steel and Reliance Industries.

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