CLSA retains cautious view on markets after RBI policy
Meetings in Asia suggest that it is becoming difficult for investors to allocate more to India.
CLSA said the RBI was right in cutting the rates as the decline in food inflation appears to be structural, and believes that possibility of another 25 basis point cut exists in the next meeting as well. However, the brokerage believes that the rate cut announced on Thursday is not likely to be transmitted and instead, the borrowing cost could go up.
“On a combination of weaker flows from institutional investors, borrowing costs remaining elevated and higher frequency indicators showing signs of a small economic slowdown which has been acknowledged by the RBI as well, we believe it makes sense to be cautious on equity market outlook and portfolio positioning,” said CLSA.
Meetings with investors in Asia suggests that it is increasingly becoming difficult for them to allocate more to India because of the high valuation difference, said CLSA.
Flows, both from overseas investors and domestic investors, are likely to remain weak in the run up the general elections, which would drive a de-rating in the market, it added.
Domestic investors inflows are showing signs of weakness because of concern that trailing returns are weak and also on account of political uncertainties while FPI inflows are not doing great either, the brokerage said.
CLSA said insurance companies have been consistent sellers for the last three months, selling cumulatively $1.7 billion in the secondary markets. A significant part of this selling could be driven by Life Insurance Corporation of India to accommodate the ₹80,000 crore divestment program for FY19, of which ₹45,000 crore will likely happen before March 31, said CLSA.
India's Sensex trades at 16.8 times on a one-year forward basis while MSCI Emerging Markets index trades at 10.6 times. So far this year, FPIs have been net buyers in Indian equities, amounting to ₹2,000 crore. This is largely due to strong inflows in February. Mutual funds have been buyers in Indian equities, amounting to ₹6,800 crore.
“The domestic flows are now weakening and that’s likely to be the key driver for market de-rating going into the elections as the political uncertainties mount. We are already beginning to some reversal in the relative performance as Nifty has now underperformed the MSCI AxJ (Asia ex-Japan) and MSCI EM by 10 ppts (percentage points) and 11 ppts YTD,” said CLSA.
The foreign brokerage said Hong Kong-based investors are already close to neutral on India but Singapore-based investors still carry a large overweight on India. Nifty is about 6% away from its lifetime high of 11,760.20 hit on August 28 but mid-cap indices are down more than 20% from their highs. CLSA said being overweight large caps over midcaps is the right portfolio strategy, and within large caps, the brokerage is overweight on private banks and IT services.