Credit Suisse believes there is a risk of earnings cuts to bring growth closer to historical trend and also that of P/E de-rating once these aggressive estimates do not play out
Global brokerage Credit Suisse is betting big on industrials, corporate banks, energy, metals, information technology sectors while running an underweight position in consumer discretionary, staples and non-banking finance companies (NBFC).
It expects a reversal in the industrial sector and corporate banks in the coming year.
“Industrial has underperformed by 48 percent this decade. Also, as euphoria in the power sector fizzled in 2018, there was a good period of steep underperformance by industrials till 2013 and has been declining since then. Now we are expecting a reversal,” said Neelkanth Mishra, Co-Head of Equity Strategy, Asia Pacific & India Equity Strategist, Credit Suisse.
He was speaking at a press conference to discuss Outlook 2019.
Within the Indian market, the preference for brokerage firm remains for the less expensive industrial stocks which are showing good earnings momentum.
Giving the rationale for being underweight on consumption, Mishra said stocks in the sector are too expensive and run the risk of earnings cuts.
“Despite the recent correction, for both consumer staples and consumer discretionary sectors, the P/E premium is close to all-time highs. Consumption growth is starting to slow but misplaced expectations of pre-election handouts are keeping P/E elevated," he said.
The consensus is also building in aggressive earnings estimates for staples for FY19-21 as against sub-10 percent seen in 2015-18, Mishra said.
Credit Suisse believes there is a risk of earnings cuts to bring growth closer to historical trend and also that of P/E de-rating once these aggressive estimates do not play out.
Mishra is also worried about the lack of growth in NBFC space as balance sheets of several firms in this sector are smaller than they were in September.
In its portfolio, the brokerage firm has added two percentage points from metals to industrials.
Speaking about the outlook for Indian equities, Mishra said, “As monetary conditions are expected to tighten at a time when global growth is surprising negatively, volatility is likely to remain high in global markets in 2019. Indian equities would be affected too, particularly if equities globally see a compressing in valuation multiples."
Contrary to trends in the last decade, when the slowdown was primarily led by weak investment activity, the current slowdown is likely to be due to weak consumption; the stimulatory effects of the seventh pay commission are fading and the impact of slower growth for NBFC could be a headwind too.
He said, while the headwinds from higher oil price and higher interest rates have eased, credit availability is a key concern for consumption and growth. two-year CAGR (compounded annual growth rate) of GDP growth was steady at 6.8-7.0 percent.
On the other hand, the pickup in investment activity seen over the past six quarters is likely to sustain but FII inflows may remain under pressure.
The global context of slower growth, higher rates, less liquidity and more volatility affects the Indian markets through the economy, and through flows.
The brokerage firm expects growth to slow down in the first half of 2019.
Mishra is of the view that politics which will be at the forefront in the first half of 2019, particularly election outcome will not affect the market too much.
“Elections often throw up unexpected results, and investors fear market volatility. However, we observe that in the last six general elections, going back to 1996, there was no visible change in market direction at the time of general elections,” Mishra said.Among stocks, the top picks for Credit Suisse are Larsen & Toubro, Bharat Heavy Electricals, State Bank of India and ICICI Bank, while the least preferred are UltraTech Cement and Hindustan Unilever.