Moneycontrol
Last Updated : Mar 17, 2019 07:55 AM IST | Source: Moneycontrol.com

Positive trend can persist as rupee moves, new opinion polls add confidence: CLSA

Turnaround in political sentiment and FPI flows coupled with the expected large inflows from rights issues and the Arcelor deal have driven the rupee appreciation, and the rupee could stay strong if the flows continue.

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CLSA

The rapid turn-around in investor sentiment around India has surprised many.

As indicated in our Investor sentiment improves report, higher probability of a more stable government has been the key.

Opinion polls published earlier this week indicate a gain of 30-40 seats for the BJP compared to early February. In addition, the BJP has also stitched important pre-poll alliances in the state of Assam and North East, which can drive a gain of 6-10 seats.

The improvement in sentiment is most visible in the mid-cap index, which is up 10 percent from the February 2019 lows.

The flows show a divergent trend. The foreigners have turned decidedly optimistic as FPI inflow YTD has turned +$4.4 billion, against $2.1 billion per year of average flows for the past three years. The domestic mutual fund inflows, on the other hand, show a declining trend.

Our equity demand supply analysis suggests a usual institutional flow of 1 percent of the free float market cap is needed in the secondary market to deliver a 10 percent index return in a year.

Assuming $10 billion of equity paper issuance (average for the past five years), an institutional flow of $20 billion would be needed. This looks difficult over the next 12 months but could be maintained for the next few months if helped by foreign flows.

Turnaround in political sentiment and FPI flows coupled with the expected large inflows from rights issues and the Arcelor deal have driven the rupee appreciation, and the rupee could stay strong if the flows continue.

Taking advantage of improved US dollar flows, RBI has announced a $5 billion swap over a three-year period.

This will not only infuse much-needed INR liquidity but also help reduce the currency forward premium. The premium already corrected by 40 bps on 14 March and should encourage more hedged investments by FPI, possibly into corporate bonds, helping contain currently elevated credit spreads.

The RBI move, however, will imply lower OMOs, at least in the short term, and better liquidity at the shorter end. This can further steepen the yield curve even as more rate cuts will bring down short-end rates but fiscal pressures keep the long bond yields at higher levels.

The classical interpretation of a steeper yield curve is the market expectations around growth and inflation moving up. But this may not be relevant for India due to G-Sec market distortions. Current economic data remains weak, and the broader economic revival needs a property market recovery which is about 2-3 quarters away.

We cut our weighting on IT services further, bringing it to a slight U-WT. We reduce our weightings of Tata Consultancy Services (TCS) and L&T Tech (LTTS). The sector fundamentals remain strong, and our change of stance is more tactical.

We continue to add weight on laggard value stocks as a theme. We add Bharti Airtel in the model portfolio as the ongoing rights issue and the expected Africa IPO / tower sale will drive deleveraging.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.
First Published on Mar 17, 2019 07:55 am
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