In his latest GREED & fear report, Jefferies' Christopher Wood, believes that it is time to add exposure to realty stocks as the end of the Indian monetary tightening cycle is at hand.
GREED & fear continues to believe that this property cycle can run for at least another three to four years given the seven-year duration of the preceding downturn and the resulting pent-up demand. Housing volumes are expected to grow by an annualised 15 percent over the next few years given that they only grew by an annualised 2 percent between 2010 and 2022, it said.
Residential inventory for the top-7 cities has declined from a peak of 45 months in October 2017 to an 11-year low of 18.6 months of sales in March, while residential property prices across the top seven cities rose by an average of 10.2 percent YoY in 1Q23, the highest growth rate since 4Q12.
This means now is the time to add exposure to property stocks if it is believed that the end of the Indian monetary tightening cycle is at hand, advised Wood. These stocks went vertical in the second half of 2021 when it became clear that the property upturn was finally underway but they have traded sideways to lower during the RBI’s 290 bps monetary tightening cycle since last April. Still, they are up 25 percent from the recent low reached in late March, it informed.
GREED & fear is already heavily invested in these stocks in the various portfolios but will take the opportunity to add to exposure this week.
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Still, one point to note about the property upturn is that it is very heavily skewed to the middle-class and luxury markets whereas the affordable housing segment remains relatively lacklustre, it reported. This reflects a broader trend that the rich have been getting richer in India in the recovery out of Covid, it added.
According to the report, a trickle down should now be happening with the construction upturn triggered by the housing recovery leading to a pickup in rural remittances as migrant labour goes to work on construction sites. New project launches in top-7 cities rose by 30 percent YoY to 570 million sq ft in the 12 months to March, the highest level since November 2013, the report added.
If the residential property story remains straightforward, with affordability not really challenged by the recent monetary tightening cycle, the really interesting point to GREED & fear is the accumulating evidence that India could be on the brink of a major capex cycle.
The macro evidence for this is that gross fixed capital formation has begun to move up as a percentage of nominal GDP, having been in a downtrend since FY09, the report highlighted. The gross fixed capita formation to GDP ratio declined from a peak of 35.8 percent in FY08 to 27.3 percent in FY21 and has since risen to an estimated 29.2 percent in FY23.
Meanwhile, the bottom-up evidence is that private sector new project announcements, a good leading indicator, are surging. Private new project announcements have risen from Rs 5.1 lakh crore in FY21 to Rs 25.7 lakh crore in FY23, while the order books of industrial companies are growing. For example, Larsen & Toubro’s order flow rose by 19 percent YoY in FY23, the report added.