Mumbai: The valuation froth in Indian equities has settled even as the earnings season has been disappointing and the outlook is weak, said Credit Suisse Wealth Management India in a note.
Credit Suisse Wealth has recently upgraded global equities to positive from neutral as it expects global equity markets to remain resilient amid the slowing growth environment. “The MSCI India is now trading at a 12-month forward PE of 16.8, at a premium to the MSCI EM Index of 46 per cent, in line with its 10-year historical average, down from the peak of 74 per cent premium in September 2018,” said Credit Suisse Wealth.
“Even assuming more downgrades to come in the rest of the year, India still offers higher growth potential versus peers and with an accommodative monetary policy stance by local and global central banks, overall equity valuation could see resilience," the firm said.
Given a dovish stance by major central banks across the world, the flows could benefit India; however, the recent spike in oil could dampen the near-term outlook, said Credit Suisse Wealth.
The firm's fixed income team is bullish on short duration bonds and high quality corporate papers in the Indian debt market.
Credit Suisse Wealth believes that concerns over government finances are increasing with nominal GDP growth coming in at a 17-year low in June quarter.
Despite the RBI’s surplus transfer of Rs 1.76 lakh crore to the government, the revenue shortfall is material and hence the government will have to resort to even a higher off-balance sheet financing and/or cut expenses if at all it wants to keep its headline fiscal deficit target in check, it said. Credit Suisse Wealth sees ‘good scope’ for aggressive rate cuts from the RBI.
Its macro strategy team expects the Reserve Bank of India to cut repo rate by another 40-50 bps (basis points) in its October meeting and possibly reduced by 25 bps more before the end of FY20, said Credit Suisse Wealth.
The firm said that the sudden spike in crude oil prices as a result of drone attacks on Saudi Arabia's key oil facilities raises concerns on inflation and the rupee. While there is no immediate fix for the economy, gradual transmission of rates will help to lower lending rates and incentivise spending in the next few quarters, it said.
The risk of a global recession is at its highest since August 2009 and this fear continues to temper investors' risk appetite, according to a fund manager survey for the month of September by Bank of America Merrill Lynch.
About 38 per cent of the investors who were polled expect a recession over the next year while 59 per cent see a recession as likely. But the percentage of fund managers who see this risk materialising is the highest since August 2009.
Trade war concerns continue to top the list of tail risks cited by investors (40 per cent) while monetary policy impotence and bond market bubble were the other two biggest tail risks for markets.
About 12 per cent see slowdown in China as the biggest tail risk.
US China trade war is the new normal and won't be resolved, according to 38 per cent of those surveyed while 30 per cent said a resolution will be found before the 2020 US Presidential elections.
BofAML's September Global Fund Manager Survey was conducted between September 6 and 12, and 235 panelists with $683 billion AUM participated in total.