Jitendra Gohil, Director– Global Investment Management at Credit Suisse Wealth Management, India, is bullish on the country and says the market is underestimating the growth outlook.
The FY 2024 growth will be better than 6 percent, as projected by the consensus, and it could even be higher if oil price fall on a weaker global outlook, Gohli, who has more than 20 years in the capital market, tells Moneycontrol in an interview.
He expects NBFCs and the banking sector to do well as the liquidity situation eases and interest rates fall over the next nine-12 months. Gohil expects a consumption recovery as well but warns a bad monsoon season can pose a risk. Edited excerpts:
Are you super bullish on rate-sensitive segments such as banks, NBFCs, real estate and autos?
For the last couple of months, we have been recommending interest-rate-sensitive sectors. In our view, interest rates in India most probably have peaked, which may benefit these sectors. Also, the RBI has the headroom to cut rates in the latter part of the fiscal year, as inflation may ease toward the RBI's comfort zone.
NBFCs have underperformed. However, as the liquidity situation eases and interest rates fall over the next 9-12 months, NBFCs are in a good position to outperform. Banking sector credit growth could see some surprise in the second half as we are more optimistic about India’s growth outlook compared to peers.
The real estate sector has seen marked improvement in fundamentals and our preference is for the large and premium developers.
Your take on FMCG and consumer durables sectors which may benefit from rural recovery?
Broadly speaking, the sector may see margin tailwinds as the commodity prices have come down sharply and demand has started to see some improvement with green shoots visible in the rural areas. For example, passenger car sales and tractor sales were doing reasonably good and now two-wheeler sales have started to pick up, which is a good sign.
Management commentary also suggests that signs of consumption recovery in rural areas are visible. Apart from improvement in ease of financing, re-stocking ahead of the festive season, the cricket World Cup in October-November and the general election in May 2024, etc are some of the events that may lead to better consumption in the next six-12 months, in our view.
For the auto sector, the supply shortages have eased and may ease further along with input cost inflation. We have also turned positive on QSR (quick service restaurant) segment where we believe the industry will see improving demand conditions along with falling commodity prices helping margin expansion.
The risk is a bad monsoon. However, we note that the government is actively taking steps in curtailing food inflation with higher imports and export curbs whenever necessary. Moreover, due to past initiatives, the dependence on the monsoon has also reduced.
After the recent rally, do you think the market can still deliver more than 10 percent returns by the year-end?
For the Nifty Index, we expect low to mid-double-digit returns in CY 2023 with good performance in the second half. From the Nifty50 valuation perspective, we believe it is reasonable at around 18x; however, in our view, the Nifty deserves to trade at a higher valuation premium versus own history and versus peers.
We are a little more constructive on Nifty valuations and believe there is further scope for the Nifty valuation to expand in the second half. For over 18 months now, we have been positive on the midcaps versus the largecaps and we maintain our view that midcaps may continue to outperform the largecaps over the next few more quarters.
Over the past 10 years, on average, India trades in line with SPX Index and just 10 percent of the times, the Nifty Index trades at less than 1.5 points below the SPX Index on a 12-month forward PE basis. Currently, the Nifty Index and SPX Index trade at 12-month forward PE of 18.3 and 18.6, respectively.
However, we note that while the 10-year yield in the US has risen around 70 bps over the past 12 months, India’s benchmark 10-year yield has fallen by about 40 bps in the same period. Similarly, for the past five years, the Indian 10-year yield has fallen 110 bps ,while in the USA it has gone up 70 bps.
The INR forward hedging risk premium has also fallen materially, which gives us some comfort that valuation for India may see an upward revision in the second half of the year once the Fed is done with the rate hiking cycle, most probably by July this year, as per our global investment committee. While India’s weight in the MSCI EM Index has gone up, the FPI holding of BSE 500 Index companies has just recovered from a 10-year low in March 2023.
India is probably the only large economy having a "zero" probability of a recession in the next 12 months and the GDP growth outlook has surprised on the upside with inflation well under control. Hence, we won’t be surprised if the Nifty index trades at 20x once the Fed starts to cut rates next year. The upcoming general elections will also boost sentiment if we see a full majority for the current government.
Do you expect Indian equities to continue to get FPI flow in the coming months? Why do you believe India is a buy-on-dip structural opportunity?
It depends on the global growth outlook and how the dollar behaves. Our view is that slower economic growth in the developed markets and in China should benefit India from flows' perspective. For example, FPIs have started becoming positive on India since March when the US banking crisis resurfaced, commodity prices fell and China’s growth started to disappoint after that.
We believe lower commodity prices are the key as the FPIs still view India as an expensive market relative to other countries. Hence, we believe any correction led by FPI selling should be used as a buying opportunity.
Do you believe actual FY24 GDP growth could surprise on the upside compared to the consensus forecast of 6 percent?
Yes, we are more constructive on GDP growth in India and believe the market is underestimating India’s growth outlook. The Centre has revised the real economic growth for FY20, FY21 and FY22 upwards by 20 bps, 77 bps, and 42 bps, respectively. And the FY23 GDP surprised consensus on the upside recently.
We believe the FY 2024 growth will be better than 6 percent, as projected by the consensus, and it could be considerably higher if oil prices fall with a weaker global growth outlook. We expect FY 2024 manufacturing export growth to be descent despite a weaker global growth environment as India is gaining market share in the export market.
Moreover, the service sector should also see a good upside, given the higher wage growth inflation in the developed markets. The current account deficit isn’t as bad as feared earlier and the PMI Index is one of the highest in the world. The RBI also surprised positively with a pause in the previous policy meeting.
On the downside, the risk could arise from a very bad monsoon and a spike in oil prices if global growth recovers fast, geopolitical tensions escalate, and China comes out with a large fiscal stimulus, leading to higher global inflation.
Do you think you will change your cautious stance on the IT sector after June FY24 quarter earnings?
We are cautious on the IT sector for over a year now and, in our view, the valuation as well as the earnings have the potential to correct further. The June quarter results might be disappointing, and we will evaluate once the earnings correction is over.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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