As Foreign Institutional Investors (FIIs) shift from being buyers to net sellers and with India's performance lagging behind MSCI Emerging Markets (EM) by 3.2 percentage points over the last month, global brokerage firm Jefferies is recalibrating its investment approach in the Indian equities market. The rosy outlook for Indian stocks, often referred to as a "goldilocks" position, is now being questioned amidst factors like surging crude prices, China's resurgence, escalating India Consumer Price Index (CPI), and increasing yields.
While acknowledging the near-term vulnerability, signs of a potential capital expenditure (capex) upcycle have emerged. Jefferies analyst Mahesh Nandurkar highlighted the firm's preference for domestic cyclicals such as financials, industrials, and property, alongside midcap stocks.
Jefferies has restructured its India model portfolio, making strategic shifts. Notably, it has reduced the weightage of heavyweight Reliance Industries (RIL) by 3 percentage points, reallocating it to Axis Bank and HDFC Bank. Additionally, the firm has taken profit in the property sector, which had experienced a surge following the pause in rate hikes in April 2023. This has led to a trimming of the overweight position in property from 4.5 to 3 percentage points, with the funds reallocated to the metals sector due to its potential to benefit from the commodity upcycle fueled by optimism around China.
Within the India portfolio, ICICI Bank holds the highest weightage at 10.7 percent, followed by HDFC Bank at 10 percent, and Axis Bank at 7.3 percent. The weightage of RIL has adjusted to 6.7 percent, and ITC holds a position of 7 percent.
Jefferies assessed the ongoing earnings season for the Nifty, noting that earnings have generally been in line with expectations, with a slight 0.2 percent reduction in FY24 Nifty earnings thus far. Key earnings drivers have been large lenders experiencing over 30 percent growth and the cement sector registering 8-20 percent volume growth, with a positive demand outlook across the board. Notably, L&T reported strong order flow, with a year-on-year increase of 57 percent and a higher prospect pipeline of 33 percent year-on-year. The property sector highlighted low inventories amidst surging property prices.
Considering the current landscape, Nifty is trading at 19 times its 1-year forward earnings, reflecting an 11 percent increase from the 10-year average. Jefferies pointed out that relative valuations are still within average levels compared to the EM and AxJ benchmarks, indicating limited risk of significant underperformance for India. The firm anticipates that Indian equities might exhibit range-bound movement in the near term before any potential next rally.
In recent weeks, Nifty's performance has fallen behind both MSCI EM and MSCI Asia ex-Japan by 3.2 and 3.1 percentage points, respectively. This divergence has been attributed in part to China's robust rally prompted by new stimulus announcements. After accumulating a net $16.5 billion from the lows of March 2023 to the peak, FIIs have shifted to net sales of $0.5 billion over the past 8 days in the secondary market. These dynamics reflect the evolving sentiments and strategies of both institutional investors and the broader market.
