Indian equities are likely to advance 10% to 15% over the next few months as global yields and crude oil prices begin to cool, according to Vikash Kumar Jain of CLSA.
The recent risk-off sentiment across global financial markets has been driven by rising rates and yields, largely tied to crude prices and geopolitical tensions surrounding Iran, Jain told CNBC-TV18 in an interaction.
However, a shift towards a more patient strategy by the US has increased the flow of barrels, signalling a potential endgame to the immediate supply concerns.
“How I see this playing out is perhaps sometime in the next few weeks, we will see some kind of conciliation or either ways supplies picking up,” Jain added. This would ease nervousness around inflation, allowing yields to cool and sparking a relief rally. He expects an interim “pain bottom” within days before a broader recovery across global financial assets takes hold.
The domestic market setup appears favourable for a sustained uptrend. India remains the fastest-growing large economy but is currently trading slightly below fair valuations amid a global bull market. Coupled with deeply depressed local sentiment, this combination typically serves as a recipe for reasonably good upside, according to the CLSA’s India Strategist.
Concerns that India might lag in a global economy driven by artificial intelligence have also lost their sting. The Information Technology (IT) services sector, which is most exposed to the AI debate, has seen its weight in the country benchmark drop from a peak of 20% three to four years ago down to 6% or 7%. This correction has already absorbed much of the vulnerability to AI-related shocks.
In terms of sectoral positioning, CLSA’s model portfolio is overweight on private banks, select discretionary retail, commodities, autos and real estate. Rising rates on a multi-quarter basis generally benefit private lenders, which are now presenting compelling value.
On a growth-adjusted basis, Indian banks are nearly the cheapest in the world. Over a three-year period, they have underperformed developed market peers by 100 percentage points. While their return on equity (ROE) is now similar to US and global banks, their price-to-book ratio is only slightly higher, making them highly attractive when adjusted for their superior growth rates, Jain said.
In the auto space, the argument that growth rates will moderate from the recent 20% to 23% pace back to a normalised 6% to 7% is already reflected in stock prices, the CLSA strategist said. Many auto names have fallen below the levels seen before the Prime Minister announced Goods and Services Tax (GST) cuts last year, bringing them close to bear-case valuations, Jain added.
Meanwhile, CLSA has steered clear of insurance and hospital stocks due to a heavy regulatory overhang. Despite this caution, proprietary data tracking domestic mutual funds until the end of August revealed that insurance remained their largest overweight position among financial sub-sectors, ahead of private banks and non-banking financial companies (NBFCs).
For the full interview, watch the accompanying video
CLSA’s Vikash Jain sees 10% market upside, overweights private banks and commodities
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