Why India is no longer a star? Foreign brokerages speak up
JP Morgan has gone tactically underweight on India, the big concern they say is rising interest rates. Citigroup has been underweight on India for a while even though earnings have been impressive. Here's a quick take on what's bothering the big four foreign brokerages about India.
2006-05-04 11:50
Story continues below
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While the stars of the Indian stock market continues to shine taking it to new heights regularly, there are a set of FIIs that are sounding a bit negative on the Indian markets now.
Reports in January by CLSA had suggested that the euphoria of emerging markets will die down in 2006. Following this, soon other major FIIs like JP Morgan, Morgan Stanley and Citigroup too sounded the caution bell.
What is exactly spooking these FIIs?
Some say its rising interest rates, others blame it on valutions.
Asian Regional Strategist at JP Morgan, Adrian Mowat claims that other emerging markets look more positive as compared to India.
Mowat says, "We have downgraded India because we think we can get higher returns in other Asian and emerging markets. This is very much a relative call in what we still see as a bull market in emerging markets. So my advice to clients is to take some money out of India and put it to work in places like Taiwan, China, Singapore and the Asia Pacific region. In emerging markets we still like South Africa and Russia."
Mowat also goes on to say that there is anecdotal evidence that funds are shifting focus to other markets now.
He says, "I had many of my competitors downgrading this market below the 10,000 level. Also quite a number of funds are underweight on India because valuations are maybe 20-30% below current levels. It is a mixed picture when I talk to clients, I find it much easier to persuade them to put money into places like Taiwan and China at this point of time than to buy into Indian equity."
In the same breath Mowat also says that there will not be any significant correction in the Indian market. "In my view it still makes sense for Indian households to diversify their savings into equities particularly when there is a strong growing economy and relatively high inflation. However, bond yields are still yielding less than 7.5%," he says.
Chief Economist at CLSA, Jim Walker on the other hand says that while the emerging markets euphoria may die down in 2006, the Indian economy looks good.
He says, "The euphoria of the emerging markets over the last 2-3 years is probably going to die down with some pretty weak performance during 2006. Therefore, for the differentiated performance, we still look at Indian economy, we are extremely confident about. We look at Chinese economy, where we were much less confident. There are differentiating factors but overall I wouldn't be surprised to see an underperformance from emerging markets this year, whereas at the moment the market attitude is very positive. On crude oil and given our views on China, our views generally on global economy, we expect crude oil prices to fall this year but we expected them to fall last year as well."
He adds that monetary conditions globally are tightening, especially from US, where one is expecting few more rate rises.
He says, "It is not just rate rises, if we look at action and monetary aggregates in US, especially very high power of monetary base, then thats been slowing now for three years. Thats going to give financial markets more difficulty as the year progresses, just in terms of real economy taking more of liquidity. Financial markets are going to find it hard to move up against that. In the past when that had been the case in US, emerging markets did not do very well."
Director at Citigroup, Hans Goetti is of the view that valuations and fund flows pose a major concern for Indian markets.
He says, "The market will probably continue to go up as long as you have strong fund flows. Of course, fundamentals have to be there and they are. We are looking for 15% earnings growth for the next several years and I think that is very supportive. On the other hand, valuations are a concern. One of our competitors has downgraded India because of valuation concerns, concerns on higher inflation and so on. There are certainly concerns out there, but fund flows are the key."
He adds that they have had an 'underweight' rating on India for quite some time. "We have had an underweight position on India for quite sometime. This is all relative. It has to be in context of a regional portfolio. Indian valuations as compared to Asia, comes out as the most expensive market. One probably has to compare India with itself. We are talking about forward price earnings ratio of about 19 times," explains Goetti.
Morgan Stanley has gone underweight on Indian markets. They believe that the India story is a liquidity-driven one and therefore they are cautious on it. In their view, India in comparison to other Asia-Pacific markets should be an under performer.
Asia Pacific-Equity Strategist at Morgan Stanley, Malcolm Wood says, "We are underweight on India in our regional model portfolio. In our view India in comparison to other markets in Asia Pacific should be an under performer. As a consequence we are underweight. In terms of the magnitude of correction, Indian market is trading in a material premium to other markets in the region. We put that to about 20%. In addition to that it is trading at about 1015 % premium to the US market."
However, he adds that a huge correction is not needed but something is needed to bring India back in line with the regional indices.
He also believes that the Indian market is surprising everyone on the upside, the reasons being very strong inflows into Indian mutual funds, no let up in global risk appetite, with inflows into global funds seemingly continuing unabated as well.
But what are they are still positive on?
All is not looking grim because these brokerages have also given stocks and sectors, which they feel hold out promise now.
CLSA:
Very positive on banking stocks.
JP Morgan:
Continues to like key mortgage lenders like HDFC. In their regional portfolio they hold cement companies like ACC at this point in time, and are positive on cement as a whole.
Citigroup:
-Finds sectors like banks, IT, telecom and energy attractive and would definitely want to hold positions in them.
-Positive on cement since prices have gone up due to very strong demand. Overweight on cement and Grasim Industries is the top pick.
-They believe that cement will remain attractive and prices will continue to go up as long as the demand is there.
-Oil prices will probably remain high. There is certainly room for upside surprises in the oil sector. However it faces risks on the macro side.
Morgan Stanley
-Positive on technology sector as a consequence of good earning numbers, as well as a consequence of relative valuation for this sector in an Indian market context.
Thanks and Regards
Supratik
JP Morgan has gone tactically underweight on India, the big concern they say is rising interest rates. Citigroup has been underweight on India for a while even though earnings have been impressive. Here's a quick take on what's bothering the big four foreign brokerages about India.
2006-05-04 11:50
Story continues below
advertisement
While the stars of the Indian stock market continues to shine taking it to new heights regularly, there are a set of FIIs that are sounding a bit negative on the Indian markets now.
Reports in January by CLSA had suggested that the euphoria of emerging markets will die down in 2006. Following this, soon other major FIIs like JP Morgan, Morgan Stanley and Citigroup too sounded the caution bell.
What is exactly spooking these FIIs?
Some say its rising interest rates, others blame it on valutions.
Asian Regional Strategist at JP Morgan, Adrian Mowat claims that other emerging markets look more positive as compared to India.
Mowat says, "We have downgraded India because we think we can get higher returns in other Asian and emerging markets. This is very much a relative call in what we still see as a bull market in emerging markets. So my advice to clients is to take some money out of India and put it to work in places like Taiwan, China, Singapore and the Asia Pacific region. In emerging markets we still like South Africa and Russia."
Mowat also goes on to say that there is anecdotal evidence that funds are shifting focus to other markets now.
He says, "I had many of my competitors downgrading this market below the 10,000 level. Also quite a number of funds are underweight on India because valuations are maybe 20-30% below current levels. It is a mixed picture when I talk to clients, I find it much easier to persuade them to put money into places like Taiwan and China at this point of time than to buy into Indian equity."
In the same breath Mowat also says that there will not be any significant correction in the Indian market. "In my view it still makes sense for Indian households to diversify their savings into equities particularly when there is a strong growing economy and relatively high inflation. However, bond yields are still yielding less than 7.5%," he says.
Chief Economist at CLSA, Jim Walker on the other hand says that while the emerging markets euphoria may die down in 2006, the Indian economy looks good.
He says, "The euphoria of the emerging markets over the last 2-3 years is probably going to die down with some pretty weak performance during 2006. Therefore, for the differentiated performance, we still look at Indian economy, we are extremely confident about. We look at Chinese economy, where we were much less confident. There are differentiating factors but overall I wouldn't be surprised to see an underperformance from emerging markets this year, whereas at the moment the market attitude is very positive. On crude oil and given our views on China, our views generally on global economy, we expect crude oil prices to fall this year but we expected them to fall last year as well."
He adds that monetary conditions globally are tightening, especially from US, where one is expecting few more rate rises.
He says, "It is not just rate rises, if we look at action and monetary aggregates in US, especially very high power of monetary base, then thats been slowing now for three years. Thats going to give financial markets more difficulty as the year progresses, just in terms of real economy taking more of liquidity. Financial markets are going to find it hard to move up against that. In the past when that had been the case in US, emerging markets did not do very well."
Director at Citigroup, Hans Goetti is of the view that valuations and fund flows pose a major concern for Indian markets.
He says, "The market will probably continue to go up as long as you have strong fund flows. Of course, fundamentals have to be there and they are. We are looking for 15% earnings growth for the next several years and I think that is very supportive. On the other hand, valuations are a concern. One of our competitors has downgraded India because of valuation concerns, concerns on higher inflation and so on. There are certainly concerns out there, but fund flows are the key."
He adds that they have had an 'underweight' rating on India for quite some time. "We have had an underweight position on India for quite sometime. This is all relative. It has to be in context of a regional portfolio. Indian valuations as compared to Asia, comes out as the most expensive market. One probably has to compare India with itself. We are talking about forward price earnings ratio of about 19 times," explains Goetti.
Morgan Stanley has gone underweight on Indian markets. They believe that the India story is a liquidity-driven one and therefore they are cautious on it. In their view, India in comparison to other Asia-Pacific markets should be an under performer.
Asia Pacific-Equity Strategist at Morgan Stanley, Malcolm Wood says, "We are underweight on India in our regional model portfolio. In our view India in comparison to other markets in Asia Pacific should be an under performer. As a consequence we are underweight. In terms of the magnitude of correction, Indian market is trading in a material premium to other markets in the region. We put that to about 20%. In addition to that it is trading at about 1015 % premium to the US market."
However, he adds that a huge correction is not needed but something is needed to bring India back in line with the regional indices.
He also believes that the Indian market is surprising everyone on the upside, the reasons being very strong inflows into Indian mutual funds, no let up in global risk appetite, with inflows into global funds seemingly continuing unabated as well.
But what are they are still positive on?
All is not looking grim because these brokerages have also given stocks and sectors, which they feel hold out promise now.
CLSA:
Very positive on banking stocks.
JP Morgan:
Continues to like key mortgage lenders like HDFC. In their regional portfolio they hold cement companies like ACC at this point in time, and are positive on cement as a whole.
Citigroup:
-Finds sectors like banks, IT, telecom and energy attractive and would definitely want to hold positions in them.
-Positive on cement since prices have gone up due to very strong demand. Overweight on cement and Grasim Industries is the top pick.
-They believe that cement will remain attractive and prices will continue to go up as long as the demand is there.
-Oil prices will probably remain high. There is certainly room for upside surprises in the oil sector. However it faces risks on the macro side.
Morgan Stanley
-Positive on technology sector as a consequence of good earning numbers, as well as a consequence of relative valuation for this sector in an Indian market context.
Thanks and Regards
Supratik
