Goldilocks position for Indian equities is getting questioned: Jefferies

Rising crude oil prices, traction in China equities and inflation concerns back home are casting a shadow on the Indian equity markets in the short term, believe analysts at Jefferies.

They said this could see the markets remaining range-bound in the near term before the next leg up.

“Goldilocks position for Indian equities is getting questioned with crude rallying, China gaining some traction, rising India CPI (consumer price index-based inflation rate) and yields moving up.

“Foreign portfolio investors (FPIs) have turned net sellers, and India has underperformed the MSCI EM by 3.2 percentage points (ppts) over the last one month,” wrote Mahesh Nandurkar, managing director (MD) at Jefferies, in a recent note co-authored with Abhinav Sinha and Nishant Poddar.

Meanwhile FPIs, after buying a net $16.5 billion from March 2023 lows to the recent market peak, have sold a net $500 million in the secondary market.

The peak period saw the Sensex hit a 52 week high of 67,619.17 on July 20, 2023, and the Nifty50 came within a kissing distance of the 20,000 mark.

The Nifty, post the rally since March 2023 low, is trading at 19x one-year forward price- to earnings (PE).

This is slightly off one standard deviation but up 12 per cent since March lows and 11 per cent above the 10-year PE average, the Jefferies note said.

“On our preferred yield-gap parameter (10-year bond yields less 1/Nifty PE), at 193 basis points (bps) is up 52 bps since March lows and 62 bps above average, pointing towards stretched valuation.

“Relative valuations, however, are still at average levels compared to emerging markets (EM) and Asia ex-Japan (AxJ) benchmarks; and as such, the risk of substantial underperformance for India may be limited.

“We believe that Indian equities will likely be range bound in the near term before the next rally,” Nandurkar wrote.

Oil & inflation

Another sore point for the markets is the likely rise in inflation in the backdrop of flaring food prices, especially tomato. Between June 1 and August 5, retail tomato prices have shot up 444 per cent.

Although its weight in CPI is only 0.6, this increase is likely to add 120 bps to the headline.

Tomato, onion and potato together account for only 2.2 per cent of headline CPI but contribute nearly 50 per cent to the variance in headline inflation.

“As inflation is once again set to breach the upper limit of the monetary policy committee’s (MPC’s) tolerance band, concerns surrounding its stance and action on August 10 have resurfaced.

“In June, the RBI (Reserve Bank of India) forecast Q2 FY24 CPI at 5.2 per cent year-on-year (Y-o-Y).

“The upcoming July CPI print (out on August 14) and the still elevated tomato prices in August pose upside risks to this estimate,” said Aastha Gudwani, India economist at BofA Securities India.

Crude oil prices, which have breached the $86 a barrel mark (Brent), are up nearly 18 per cent in the last one month.

They, too, could prove to be a sentiment dampener, analysts said.

G Chokkalingam, managing director (MD) for research at Equinomics Research, said global equity markets will not feel the heat of flaring crude oil price till it breaches the $100 mark.

Food prices and the progress of monsoon are some key variables he is keeping a watch on.

“The medium to long term outlook for the domestic equity markets remains appealing.

“However, in the short term (4-5 months), the domestic equity markets may see some correction.

“As a strategy, we suggest sitting tight on deep value wealth creators as the medium to long term market outlook remains good,” Chokkalingam said.

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