CLSA makes a U-turn, upgrades India to 'overweight'
Global brokerage firm CLSA has given India an "overweight" status upgrade, bumping up its India portfolio allocation to 20% above the MSCI benchmark from a previous 40% "underweight" position. The brokerage said the previous contrarian underweight position worked between late October 2022 and March 2023. It further suggested the Nifty 50 could potentially see 20-35% annual growth, and the Indian market, currently trading at fair value, may offer a 22% upside.
Reasons behind increasing portfolio allocation
CLSA stated that increased confidence is due to factors like strong credit impulse, favorable energy pricing, improving external balance dynamics, a strong GDP, and growing earnings per share (EPS). The brokerage also said that increasing profitability, a supportive macro outlook, and additional capacity for non-resident asset accumulation will sustain the Indian equity momentum trade into 2024.
Positive trajectory for India's credit impulse
CLSA sees great potential for credit growth in India and expects a positive trend for the country's credit impulse. It further said that, as compared to last year, financials, utilities, and industrials are all trading at cheaper valuations. Moreover, CLSA forecasts that India's basic balance deficit could be wiped out by the end of FY25, down from the current 1.2% of GDP deficit.
Margin contraction and GDP growth dynamics
The brokerage firm suggests that India's margin contraction is a late-cycle event, which backs a rebound in relative return on equity (ROE) and value creation compared to emerging markets. CLSA also notes that India's GDP growth outlook of over 6% stands out as the strongest among emerging markets. The brokerage also said that the country's GDP growth dynamics support a steady annual EPS increase of around 15%, given the close link between India's economic output and corporate earnings growth patterns.
Stocks that CLSA is positive on
After the upgrade, CLSA has pinpointed 11 top-notch Indian stocks with buy calls. These stocks include Ashok Leyland, BPCL, Samvardhana Motherson, HDFC Bank, Reliance Industries, ICICI Bank, Tata Motors, ICICI Prudential, ONGC, Mahindra & Mahindra, and SBI Life. These stocks boast a market capitalization of over $6 billion, an ROE above 10%, and EPS growth that outshines their respective emerging market sector peers.
IMF's economic growth forecast for India
In related news, the International Monetary Fund (IMF) recently raised India's economic growth forecast for the current fiscal year to 6.3% from the earlier 6.1%. This revision is part of the IMF's October 2023 World Economic Outlook report. IMF also projects retail inflation in India to climb to 5.5% in fiscal 2023-24 before settling down to 4.6% in 2024-25.
