Top 6 reasons why CLSA invests in India as a growth opportunity among emerging markets – Market News

Benchmark Indian stock indexes Sensex and Nifty have corrected around 10% from their highs in the last few weeks, but this seems to be good news for some. In recent events, Asian capital markets and investment group CLSA has reversed its India strategy. They reversed the tactical allocation shift from India to China and again gave India a 20 percent overweight; This means they believe investments are likely to outperform their outlook. This is because they see India as “arguably the leading scalable growth opportunity in emerging markets” after the recent correction.

if we analyze Sunday movement, large and midcap stock index MSCI India There has been an almost 10% correction in dollar terms since CLSA’s risk slicing in early October. Compared to the September 27 peak, MSCI India corrected 12%. This was also a period when India saw a steady exit of foreign institutional investors (FIIs). In November, FIIs sold around Rs 31,000 crore of stocks, followed by outflows worth almost Rs 1 lakh crore in October. According to Alexander Redman, CLSA’s managing director and chief equity strategist, “Investors we met throughout the year were specifically looking forward to an acquisition opportunity like this to address under-risking, arguably the most important scalable growth opportunity in emerging markets.”

The question is; What changed or helped? Here’s a look at the 6 key factors listed by CLSA:

1. Foreign Exchange Stability

In Redman’s words, “India has become a relative poster child of EM FX stability in recent times”. He explained how “the increase in bond net portfolio inflows following India’s inclusion in the JPMorgan GBI-EM fixed income benchmark, together with India’s increasing global export market share (relatively unaffected by the US), has supported the external position.”

However, he added that India remains sensitive to energy prices as 86% of the country’s oil consumption is imported (49% of natural gas and 35% of its coal needs) and “we remain concerned about the potential for a risk premium in the price of oil” . or, at worst, a serious supply disruption due to Iran-Israel tensions.” However, the 10% discount applied to 40% of oil imports from Russia helps “partially reduce this risk”.

2. Earnings outlook is solid

With the FII sale, earnings have been a major point of concern for Indian investors. “Earnings momentum has softened but the outlook remains solid,” Redman said. “Given the stability of the rupee and the acceleration in local currency earnings in recent years, the trend progression in dollarized EPS for India has regained its 30-year trend line,” they highlighted.

According to CLSA, India is one of the few emerging markets where the relationship between corporate earnings growth and changes in the pace of economic output is true, attributable to the country’s more domestically focused equity market.”

He said it is encouraging that the projected acceleration of India’s nominal GDP growth through 2025-2026 is strong enough to confirm current consensus EPS growth forecasts.

3. There is an advantage for MSCI India

On a 12-month time horizon, CLSA sees sufficient upside potential. Their models imply that the MSCI India Index could rise as much as 13% from current levels. “While the model shows Indian equities remaining 13 per cent overbought (although the peak deviation was as high as 21 per cent at the end of September), there is a 13 per cent upside potential for the US dollar in the next 12 months, according to CLSA economic forecasts,” he said. The CLSA report outlines a major turnaround in strategy.

4. Strong domestic retail appetite

FII sales have undoubtedly been a concern, but it cannot be ignored that domestic retail appetite is quite strong. Monthly inflows according to the latest AMFI data actually shared mutual fund SIPs (systematic investment plans) crossed the Rs 25,000 crore mark for the first time in October. According to CLSA, this offset net sales by foreign investors because “83% of Indian equities are domestically owned; this is the highest such rate among emerging markets. CLSA’s Redman said quarterly cumulative inflows into domestic equity mutual funds reached a record high, rising to 0.42% of market capitalization.

5. CLSA says, “Although appraisal is expensive, it is now a little more acceptable.”

After the latest correction, CLSA said, “India’s cyclically adjusted PE multiple fell to 33.5x from its peak of 37.9x in September. India’s asset-based valuation has fallen slightly to 4.0x from the recent peak of 4.5x. “India’s ratio of actual price book to guaranteed prices has fallen to 17% compared to the 20-year average of 29%.”

Additionally, CLSA noted that “India’s 23% price book premium over overall emerging markets is driven by the market’s superior ROE (15%, respectively) compared to India’s improved ROE (13.1% and 11.5%, respectively). 8) and can be justified by its lower COE (10.3%),” he said. structurally superior growth.”

6. IPO: Good news or bad news?

“As a proportion of market capitalization, issuance reached 1.5%, which is close to where it peaked in the last four cycles in Indian issuance, closely matching the peaks,” CLSA calculations show, given the flurry of primary market transactions. in secondary market momentum.”

According to them, “The key risk to India’s equity outlook is an acceleration in issuance that threatens to overwhelm the secondary market with supply. “12-month cumulative bond issuances (IPOs and secondary offerings) reached a record level of $66 billion in October.”