Jefferies hikes India market weight in Asia Pacific portfolio despite premium valuation; prefers these stocks

With India charting a strong economic recovery and showing signs of taming the spread of infections, equity strategist Chris Wood has found more reasons to be bullish on India. This week the global equity strategy head at Jefferies will increase India’s weightage in Greed & Fear’s Asia Pacific ex-Japan relative-return portfolio by one percentage point. This is despite the domestic stock market trading at premium valuations, which he says has a tendency to decline.

“To be sure, the Indian stock market is not cheap with the market trading at 21.6x 12-month forward consensus earnings,” he said in a recent note. However, the market veteran is hopeful that the multiple should have a tendency to decline going forward as he cited Jefferies’ head of India research Mahesh Nandurkar who is looking for 30%+ earnings growth for the fiscal year 2022 and 13.2% real GDP growth.

Recovery is here

Aiding his bullishness on India are the positive seen among banks where collection efficiencies have increased to now being near 90-97% and resumption of lending. To add to that are the rising GST collections, which gained 1.4% on-year in November. Chris Wood said that Jefferies has had some conference calls with Indian government officials in the past two weeks, and the clear focus has been, on the fiscal side, to maintain public sector capital expenditure as outlined in the budget for this fiscal year announced in February. While he noted that India’s cyclical recovery has also taken place in the absence of any huge fiscal stimulus, the trigger for recovery has simply been ending the lockdown.

Chris Wood noted that inflows into domestic equity funds remain negative though retail investors have been more active in the market. “Jefferies’ India office estimates that non-institutional participation in equity trading volume rose to an average of 84.5% in July-September quarter, up from 82% in April-June and a long-term average of 74%,” he said.

Global bond rating upgrade

Apart from the increased weightage in Asia Pacific ex-Japan relative-return portfolio, Chris Wood will also increase India’s weightage in global sovereign bond portfolio by removing the weighting in the much lower yielding Singapore 10-year government bond. “One reason for doing this is the relatively conservative Indian fiscal policy under the current BJP government. Another is the growing likelihood that India will, sooner rather than later, be included in global bond indices as a result of recent liberalisation measures,” he said.

With the recent changes, India’s weightage in the portfolio will increase to 11.5% from 8.7%. Among domestic stocks, Chris Wood assigns a 6% weightage to Reliance Industries, 3% to Maruti Suzuki, 6% to HDFC, 5% to SBI Life Insurance, 5% to ICICI Lombard General Insurance, 5% to DLF, and 3% to ICICI Bank in its Asia ex-Japan thematic equity portfolio for long-only absolute-return investors. In the coming year, the ace market strategist sees a rise in oil prices as a risk to India’s macro story as well as the Rupee. “This can be best hedged from the point of view of equity investors by owning oil stocks,” he said.