Credit Suisse said it believes that India’s macroeconomic parameters should improve during 2018. However, economic growth is likely to be weaker than currently expected. “Structural reforms have weakened visibility on most macroeconomic parameters. We have long considered India as being a ‘house under renovation’: structural reforms such as the Goods and Services Tax (GST), the Insolvency and Bankruptcy Code (IBC) and the setting up of Real Estate Regulators (RERA) in states, while structurally positive, have introduced significant uncertainty around growth, fiscal deficits, inflation, interest rates and banking system health,” said Neelkanth Mishra, managing director and India Equity Strategist at Credit Suisse.
Mishra while interacting with reporters pointed out that the state elections were likely to get more market attention as the next general elections approach. “This has limited direct economic impact, particularly after the Budget is presented, but changes in market sentiment may drive volatility,” Mishra said. Credit Suisse believes that while the price-to-earnings (P/E) ratio for the Indian market is high, it is not expensive compared to global equities. The scorecard for Q2 FY18 corporate earnings was one of the best in three years, with aggregate earnings seeing no cuts, he added. Mishra believes that consensus forecasts of 22% earnings-per-share (EPS) growth for the Indian market in FY19 may fall, but should settle in the low teens.
“The current EPS growth projection is dependent on strong growth for banks, discretionary, energy, and materials. We expect cuts to bank earnings (lower-than-expected loan growth, margins and likely increase in credit costs) and discretionary (weaker growth). Therefore, it would be unwise to extrapolate the strong earnings growth trend that we have seen this year,” Mishra said. Mishra was of the view that with India being a part of the emerging market basket it will continue to receive FII fund flows as long as the EM basket does well.
Credit Suisse is overweight on energy, metals, PSU banks and IT. The brokerage is underweight on high P/E sectors such as NBFCs, cement, discretionary and staples. It is long on HCL Technologies, ONGC, SBI, Sun Pharmaceuticals and Tata Steel while it is short on Bajaj Finance, Dr Reddy’s and Ultratech Cement.