Neutral on Indian equities from a 12-month perspective: Venugopal Garre

Markets are trying to recover after a choppy start to the 2023 calendar. Venugopal GarréSingapore-based managing director and senior analyst at investment research and asset management firm Sanford C Bernstein, in a conversation with Puneet Wadhwa, says he expects a rebound in Indian stocks, with the Nifty50 moving to 18,000 levels –18,500 this quarter. Edited excerpts:

Where is India on your shopping list?

India’s underperformance over the past six months versus emerging markets (EMs) should ease this quarter. The health of the broader emerging markets is not particularly better than that of India and, more importantly, India is still expected to post higher growth in 2023-24 (Fiscal Year 24) relative to most emerging markets.

While China particularly sounds like one with potential, given the post-Covid reopening benefits, the initial rise and economic benefit is somewhat reflected in how flows have shaped in recent months.

While China and Thailand may see more positive growth momentum in the medium term, these aspects may become relevant later in the year. Most emerging markets outside of Asia face growth and inflation challenges.

What is your exposure to Indian equities right now and what is the strategy or way forward for FY24?

We are neutral on Indian equities from a 12-month perspective as we have a broad expectation of a flat index. However, given weak macro (macro) data points, high valuations and rising rates, we previously called for an underweight in the first three months of this calendar year.

With rates closer to a peak, macro near a bottom, gains holding and valuations correcting from the peak, we expect a rally in Indian stocks, with the Nifty50 Index trading at 18,000–18,500. This trimester. Much of this bounce call is tactical, as we see risks limiting the upside.

Stock returns will be low this year, and perhaps even lower than fixed deposit rates, if one holds positions for 12 months. We expect a lot of volatility within 12 months; therefore, regular rotation and evaluation will be required to generate better returns.

However, this makes it more challenging as there will be limited directional support. Closer to the end of this calendar and the early part of next year, we see room for further market recovery. By then, macros will have started to improve, global risks will have unraveled and there will be more clarity on interest rates.

What do you think are the key risks that global financial markets are ignoring as it stands?

We are not in a global financial crisis type scenario around the world, as global challenges are not led by consumers and policymakers are moving quickly to contain risks.

We see a different environment where the period of moderation and correction of the global economy lasts longer. The risk of a prolonged recession is a higher probability outcome, not yet the consensus, and therefore not included in the price.

Similarly, we expect volatility risks to emerge within that period of slower economic growth. This can manifest in a rally in commodities, such as crude oil prices, for short periods due to continued supply-side actions and other geopolitical factors. The additional risk is greater for longer rates, as the consensus assumes that rates will start to moderate from the end of this year.

When do you see Foreign Institutional Investors (FIIs) turn favorable to Indian stocks?

There is room for some reversal in FII flows, some inflows that will be part of our rebound thesis.

We don’t see enough material inputs to move Nifty beyond the 18,500 levels, but it’s not just a confluence of positives. What matters is the degree of economic recovery in India and around the world.

Commodity prices are not only driven by demand-side activities, but also by geopolitics and supply-side actions. So from that perspective, we continue to see volatility going forward. However, there is less chance of a runaway rally in commodities in an environment of weak global demand.

The United States is headed for a recession, and this will help offset the impact of China’s reopening. Chinese policymakers are calling for modest growth in gross domestic product, despite a year of recovery, ending some key drivers for commodity gains. However, the actions on the supply side are difficult to measure, especially in commodities such as crude oil, where price controls are still managed through cartels.

Which homegrown sectors are you over/underweight?

Stocks are not easy to identify as most are still above the band in terms of valuation. Most calls are therefore relative where one has to assess growth, downside risks and valuations.

From that perspective, we see the financial as attractive; we have a slight overweight in information technology services as a contrarian pick.

Among the smaller sectors, we have an overweight in cement, real estate and appliances.

We are underweight consumer discretionary (excluding auto), consumer staples, commodities, industrials and utilities.