Any meaningful correction, say, of more than 10 per cent, is likely to result in increased foreign buying into Indian equities as global emerging market investors are underweight India, according to Christopher Wood, Global Head of Equity Strategy at Jefferies.
“This is the result of both India’s neutral weighting rising as a result of its outperformance and foreigners’ ongoing reluctance to buy aggressively because of the prevailing high valuations,” he said in his weekly newsletter Greed & fear.
FPIs have bought shares worth over ₹26,000 crore this month in the cash market.
RBI data published in August shows the highest fund raising for new projects in ten years, hinting at growing evidence of a new private sector capex cycle.
“It is reassuring to see the growing evidence that the private sector is indeed now taking up the baton. The relevant point for equity investors is that the last time India had a private sector capex cycle, in the FY02-08 period, the country’s stock market enjoyed massive outperformance in Asia,” said Wood.
While valuations remain an issue in the small- and mid-cap space, he said, the remarkable resilience of the stock market in the context of the recent hikes in the capital gains tax is proof of the extent to which Indian households now believe in the long-term equity story. India remains in the early days of building an equity culture in the sense that households still have only 5.8 per cent of their assets in equities, said Wood.
The latest data shows continuing strong inflows into equity mutual funds in India. Out of this flow the most stable is the retail systematic investment plan (SIP) where ordinary people invest a fixed portion of their monthly salary into equities.
“The supply of equity is now catching up as corporates, for entirely logical reasons given the higher valuations, look to raise equity. Still, for now at least, the inflows into equities continue to outpace the supply of new equity,” said Wood.
Wood said he is not going to reduce in any meaningful way the 49 per cent and 26 per cent which Jefferies has invested in India in its Asia ex-Japan and global long-only portfolios. The reason is that India looks set to enjoy a long runway of healthy real GDP growth running between 6-8 per cent which translates into nominal GDP growth of between 10-12 per cent.
Jefferies’ India office expects only a 25 bps rate cut this year to 6.25 per cent and a total of 100 bps in the forthcoming easing cycle. Wood believes there is room to cut in terms of the level of real rates, most particularly if looking at core CPI.
“With mortgage rates at a relatively low 8.5-9 per cent, the property market can look forward to RBI rate cuts following the now commenced Fed easing cycle,” said Wood. “With the average age of homebuyers declining in recent years from 44 to 33, banks have been extending longer duration mortgages up to 25 years. This eases the monthly debt servicing burden though the tendency for Indian homeowners remains to prepay as soon as they can afford to.”
