Jefferies’ Christopher Wood explains why Indian stock markets are underperforming

Though Indian domestic demand story remains rock solid, challenge for stock markets remains high valuations, writes Christopher Wood in his latest edition of widely followed Greed & Fear newsletter. 

“The Nifty Index is on 18.7x earnings on a 12-month forward basis, compared with a long-term average of 16.2x since 2008. Meanwhile, flows into domestic equity mutual funds have remained positive, though they are clearly slowing,” he said. 

Foreigners or FIIs have begun the year selling, presumably to fund purchases in China triggered by the mother of all U-turns after China abruptly ended covid restrictions, he says. 

“They have sold a net $1.23 billion worth of Indian equities so far this month. But they remained net buyers last quarter, buying a net $5.5 billion after having bought a net $6.0 billion in 3Q22. This followed record net selling of $28.6 billion in 1H22.”

In comparison, Indian stock markets remained resilient last year despite multiple global headwinds on the back of strong domestic economic recovery.

“The stock market remained remarkably resilient last year in the face of cumulative rate hikes of 265 bps in this monetary tightening cycle following the December 35 bps hike by the RBI. One reason for this resilience is the continuing evidence of an upturn in the residential property market, with all the resulting positive multiplier effects on domestic demand of a new cycle in property following a seven-year downturn which lasted from 2013 to 2020,” Christopher Wood writes.

The latest data shows positive momentum in terms of both the credit cycle and the continuing upturn in the residential property market despite rising interest rates, he said. “Bank credit was up 17.4% YoY in mid-December while primary and secondary market property transactions remained strong in November.”

Another positive surprise has been a sharp slowdown in inflation, which fell to 5.7% YoY, down from 7.4% YoY in September. Jefferies expects that there will be only another 25-50 bps of tightening at most. 

Budget expectations

“With a forecast central government fiscal deficit of 6.4% of GDP for this fiscal year, the government’s stated intention is to bring the deficit down to 4.5% of GDP in the next three years, which implies a 60-70 bps reduction each year. If tax revenues have continued to grow well above levels projected in the last budget announced in February 2022, the unbudgeted costs have seen unanticipated increases in food and fertiliser subsidies.  So the additional tax revenues have been going into funding increased subsidies,” he writes.