​​​
  1. What should India market strategy post-Brexit be? Credit Suisse explains

What should India market strategy post-Brexit be? Credit Suisse explains

Until clarity emerges on developments in Europe and central bank action at the global level, domestically focused sectors are the best bet

By: | Updated: July 4, 2016 9:48 AM
gjsdg 660 The UK has voted to leave the EU by a margin of 52-48%. The prevailing uncertainty around various political configurations, as well as on the second round risks to currencies, is likely to have economic as well as market implications.

The UK has voted to leave the EU. The relatively mild response in the markets so far indicates expectations of strong central bank action. But in the absence of political clarity, global investment activity may slow down causing deeper concerns on earnings outlook.

* As the reform activities in India are largely intrinsic in nature, underlying economic prospects should continue to improve, albeit at a slower pace than earlier expected. Earnings visibility in domestic focussed sectors therefore remains largely intact.
* Nearly 51% of FPI ownership in India is not India Dedicated. Global risk aversion therefore impacts India as well. Strong global linkage was the root cause of index EPS downgrades seen earlier. These risks had abated in 1H2016 but are back on the horizon.
* The next catalyst would be political developments in Europe and central bank activity globally. Given the limited scope for interest rate cuts in most economies, the markets may continue to apprehend currency volatility. The risk of INR volatility is low given BoP surplus. Until clarity emerges, we advise staying overweight domestic focused sectors: consumer, utilities and OMCs; and NBFCs.

Uncertainty can persist, prolonging risk aversion

Also Read: Will Brexit hit the climate? Bequeathing a dirty world to NextGen

The UK has voted to leave the EU by a margin of 52-48%. The prevailing uncertainty around various political configurations, as well as on the second round risks to currencies, is likely to have economic as well as market implications. The relatively mild response in the markets so far indicates expectations of strong central bank action. But in the absence of political clarity investment activity in large parts of the world may slow down causing deeper concerns on earnings outlook.

Domestic economy relatively insulated

In the case of a good monsoon, starting end of this calendar year, India can be in a Goldilocks state of improving growth and falling inflation. As the reform activities at the state and the central levels are largely intrinsic in nature, underlying economic prospects should continue to improve, albeit at a slower pace than earlier expected. Earnings visibility in domestic focussed sectors therefore remains largely intact. Indian policymakers also have meaningful fiscal and monetary room to stimulate the economy if needed. As our Asia economics team also highlights, the Indian economy should be one of the less affected relatively. Ownership and revenue linkages can still hurt markets though. As we have highlighted, nearly 51% of FPI ownership in India is not India Dedicated and is linked to Asia/EM/Global funds. Global risk aversion therefore impacts India as well. Further, nearly half of BSE100 revenues have strong global links. This was the root cause of index EPS downgrades and weak index performance. These risks had abated in the last six months but are back on the horizon.

Political/Policy error risk can keep currencies volatile

While the first round effects are now visible, the next catalyst for the market would be political developments in Europe as well as central bank activity globally. Given the limited scope for interest rate cuts in most large economies, the markets may continue to apprehend currency volatility, particularly in Asia. The risk of INR volatility is low given comfortable BoP surplus. Till clarity emerges, we would advise investors to stay Overweight domestic focused defensive sectors: consumer staples, discretionary, utilities, and OMCs (ICICI, L&T, BPCL, HUL,
HDFC, SHTF). A global low interest rate environment should also support NBFCs.

nbv

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Go to Top