Daily Voice: India equities favourably priced, earnings upgrade cycle to start in next one or two quarters, says LGT's Stefan Hofer

Stefan Hofer is the Chief Investment Strategist APAC at LGT Private Bank

According to Stefan Hofer of LGT Private Bank, India equities are favourably priced, trading at a one year forward PE of 20.6x which is below its 5-year average.

He believes corporate India balance sheets are strong, India's fiscal deficits are improving at 4.2% to 4.4%, and banks balance sheets are strong, with low levels of NPA.

The 100 bps cut in repo rate is reinforced with inflation falling below the Central Bank's target 4% inflation, good liquidity, and a recovering consumer. With the ingredients in place, India is expected to enter an earnings upgrade cycle in the next one or two quarters, said the Chief Investment Strategist APAC at LGT Private Bank, in an interview to Moneycontrol.

The LGT forecast for the broad dollar index (DXY) sees a further slide of approximately -3% over the coming 12 months. We look for meaningful upside in the EUR/USD (to 1.20) and the USD/JPY (to 140) as key drivers behind this forecast. President Trump has broken with the traditional stance that the US favours a “strong dollar” policy and is now pushing for the opposite. The US is home to large twin deficits and economic growth is set to slow over the coming quarters, hence fundamentals are consistent with a moderately weaker US dollar.

We are still concerned about the negative consequences of US import tariffs, as well as the move away from multilateralism in favour of selective deal-making with individual trading partners. Trying to assess the current level of US effective import tariffs is a moving target, but it is likely to be around 13% now. While having fallen substantially from the “Liberation Day” level of 27%, it remains very high and is pushing up end prices for consumers in the US; a de facto sales tax.

We need to recognise that the starting point for the US economy is robust: low unemployment, high level of corporate profits and robust domestic demand characterised the Biden economy that President Trump inherited. The tariffs imposed by President Trump will likely drag growth lower in the second and third quarters of 2025 - but our baseline view sees higher probability of stagflation and not an outright recession in the US.

The rates outlook for the US is a very challenging question. If stagflation materialises, then the Fed will be under pressure to sustain current interest rate levels given inflation pressures. This in turn will likely see an (open) conflict between the White House and the Fed over rates policy. As a baseline assumption, we see two rate cuts this year, but much will depend on how inflation and unemployment evolve over the coming months.

If US trade policy and geopolitics were to deteriorate further, then the ensuing “risk off” market environment would impact all emerging markets to some degree and India cannot escape such headwinds. That said, increasingly international investors are seeing India as a “standalone” case where structural themes such as the infrastructure boom and growing manufacturing base are compelling reasons to stay invested in India.

India has made high profile gains in manufacturing, when it comes to smartphone assembly. India is competing with the rest of ASEAN in terms of trying to capture more market share in manufacturing, and the advances in physical infrastructure and logistics are key pillars to keep that theme going.

Indian equities are trading at a one year forward PE of 20.6x which is below its 5-year average. And India Earnings are growing at 10% to 12% Versus the 13% to 15%. Corporate India balance sheets are strong, India's fiscal deficits are improving at 4.2% to 4.4%, and banks' balance sheets are strong, with low levels of NPA. Against this background, Indian equities are favourably priced.

In the most recently concluded quarter, Corporate India's earnings were cut by 2-4% at the aggregate. The cuts reflects the US tariffs uncertainty. However, India's central bank is on an interest rate cut cycle. The 100 bps cut in repo rate is reinforced with inflation falling below the Central Bank's target 4% inflation, good liquidity, and a recovering consumer. With the ingredients in place, India is expected to enter an earnings upgrade cycle in the next one or two quarters.