Credit Suisse upgrades India to ‘benchmark’ for 2023

Expects GDP growth to surpass consensus

Credit Suisse, gdp growth, fpi investment, global economy, indian economy
DIIs now own a record 15% of the BSE500, just 3.3 percentage points below the FPI share, which has now declined to nine-year lows.

By Siddhant Mishra

Credit Suisse has upgraded its stance on India to ‘benchmark’ from ‘underweight’ for 2023, despite concerns over inflated valuations. In its market outlook for India, the bank expects the GDP growth to surpass the consensus estimate of 6%.  

It says the resumption of government spending, revival in low-income jobs, and easing of supply bottlenecks could partially offset the adverse impact of rate hikes, a sharply slowing global economy, and the balance-of-payment (BoP) deficit.  

Credit Suisse expects flows by domestic institutional investors to lend support to the markets and keep valuation multiples supported. DII flows ($40 billion in 12 months) are now substantially larger than FPI flows ($20 billion of outflows). DIIs now own a record 15% of the BSE500, just 3.3 percentage points below the FPI share, which has now declined to nine-year lows.

Also Read: India growing faster than official data shows, says Credit Suisse

Credit Suisse expects insurance ($12 bn per year), EPFO ($7-8 bn per year) and SIP ($18-20 bn per year) contribution to sustain, even as non-SIP retail flows continue to moderate owing to higher rates and improvement in real estate. According to Neelkanth Mishra, co-head (equity strategy), Asia-Pacific, and India head (research), Credit Suisse, “Since SIP flows are mostly into largecaps, there could be a hit on mid- and small-caps going ahead.”

It expects the rebound in FPI flows to be short-lived. “This is because a significant chunk of FPI investment in India is made through global, emerging market, or APAC funds, and any de-risking strategy would lead to a resumption of outflows,” said Mishra.

However, Mishra said FII flows aren’t very likely to be impacted by the depreciation in the rupee, because the RBI has enough reserves to control the volatility in the currency.  

Also Read: Financialisation of savings to jump to 74% of GDP by FY27: Report

Rising premiums cannot remain the market driver. Of the three drivers of market returns — forward EPS, global market P/E, and India’s P/E premium to global equities — earnings and premiums have dominated returns over the past year, offsetting the fall in global P/E, he said.

In CY22, market performance was driven by India’s 12M EPS (roll-forward) and India’s rising premium to world, as global P/E declined.

A higher premium is possible but unlikely, in the firm’s view, given it has been higher only 5% of the time in the last 20 years. While higher risk-free rates and higher ERP (slow growth, uncertain geopolitics) are likely to keep the cost of equity high in CY23, the global P/E is unlikely to rise.

Consequently, the market will be driven by the 12-M forward earnings, and the current estimate of 15% roll-forward gain could be the ceiling of performance, given that the likelihood of significant upgrades to current earnings forecasts is low, as is that for large cuts. Mishra said the firm at the most sees a 12-14% upside to the Nifty in 2023.

Credit Suisse continues to prefer domestic cyclicals over global ones and is ‘overweight’ on sectors such as financials, cement, staples and construction while being ‘underweight’ on industrials, IT and metals.

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First published on: 16-12-2022 at 02:30 IST
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