The slowdown was aggravated by de-stocking due to monetary tightness
Despite continuing economic weakness in the Indian economy, Credit Suisse expects headline indices to continue to stay elevated, driven by steady fund inflows and earnings growth.
"We expect headline indices to stay elevated driven by inflows, and as most of the market cap is in stocks linked to rising penetration of products, market share gains, or global factors," said Neelkanth Mishra, co-head of Equity Strategy, Asia Pacific and India Equity Strategist at Credit Suisse.
However, Mishra refrained from giving any levels for the market.
He said that earnings growth from firms that are not directly hurt by domestic macroeconomic weakness but benefit from factors such as rising penetration of products and market share gains will help indices to stay higher.
However, Mishra was of the view that for now, the preference remains for safety and quality, but 2020 may see an inflection point in risk.
"Even as de-stocking ends in some sectors, driving some stabilisation in the Indian economy, pro-cyclical forces in credit, fiscal and sentiment may still create downside risks," he said.
According to Credit Suisse, flows from domestic institutional investors and foreign institutional investors will continue to support Indian equity market.
"A significant part of foreign portfolio investment (FPI) holdings in India appears to be longer-term in nature or benchmarked. Even one of easing global monetary conditions and reduction in global growth risk should be supportive of flows into EMs; India should then get its share," Mishra said.
Credit Suisse is running an overweight position in financials, with the overweight on NBFCs through life insurance names—both ICICI Life and SBI Life.
They are also overweight on telecom, utilities, and metals, with minor overweights on pharmaceuticals and information technology.
The global firm is underweight on consumer discretionary, cement and industrials.
Mishra feels the sharp growth slowdown of the last six quarters has been led by industry, with all of manufacturing, mining and construction slowing.
The slowdown was aggravated by de-stocking due to monetary tightness, he said.
"The most striking example is in the automotive sector, where the decline in sales to the channel was far in excess of the decline in final consumption. The double-digit decline in power demand in October-November was likely due to cuts in production to respond to excess inventory at the end of the holiday season," Mishra said.
However, he feels that the trend of de-stocking is likely to stabilize in the coming months.
While inventory adjustments will end naturally, some pro-cyclical factors could prolong the slowdown, including factors such as weak nominal GDP growth which is at a two-decade low could drive further tightening of credit conditions.
Mishra believes that central government spending, which has been elevated so far, can slow sharply given the tax shortfall. A slowdown in taxes may also hit spending by state governments.
He further said that sentiments, both for investment and consumption appear to be weak, as evident in the weak growth of Gross fixed capital formation (GFCF).Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.