Swiss multinational financial services firm, Credit Suisse(CS) has trimmed its rating on Indian equities to ‘underweight’ from ‘overweight’ citing high valuations. In a note to investors, CS stated that India’s price-to-book value (P/BV) versus return on equity (RoE) premium has risen to 50% and observed that Indian markets could under perform in the near-term based on historical evidence.
“This is only the fourth time in the past 15 years that India’s premium has risen to such a level. The three previous occasions were March 2006 (a 54% premium), December 2007 (a 49% premium) and January 2015 (a 56% premium). History suggests India could underperform,” CS analysts Sakthi Siva and Kin Nang Chik said in the note.
CS noted that MSCI India underperformed MXASJ (MSCI Asia ex. Japan) on average by 1.2% after one month of touching its premium valuations. In the three and six months of touching peak valuations, Indian markets have underperformed by 12.7% and 7.1%, respectively.
“We have been overweight India since mid-2013 when India joined the cheapest four club, but have trimmed that overweighting to just 1%, as India joined the expensive 4 club,” CS analysts said, adding that more investors switched to India as a “safe haven” during the recent sharp falls in Chinese markets.
Since June 12, Chinese stocks have fallen more than 25% – after having gained more than 150% in last one year – as China’s economy grew the weakest since 2009 and share prices got way ahead of growth and company profits. The market rout compelled more than 1400 of the 2,776 companies to halt trading. The sharp fall in resulted in Chinese equities losing more than $3 billion in market value – the size of France’s entire stock market – prompting authorities to “strictly” punish market manipulation.
In the same period, benchmark Indian indices have given positive returns of close to 6%.
CS however said the downgrade was more of a “tactical call” based on valuations and it continued to believe that India’s ROE is likely to rise in 2016. CS dropped Tata motors from its regional portfolio while Axis Bank and HCL Tech were made the top picks.
The report also said that the four most overvalued sectors in India were consumer staples, healthcare, technology and industrials. It said Indian consumer staples were trading at 534% premium compared to regional valuations while healthcare was trading at 274% premium compared to the region.