Indian small and mid-cap valuations may be challenging but they reflect superior earnings growth, said Christopher Wood, Global Equity Strategist at Jefferies.
The nature of the Indian market has fundamentally changed in terms of the extent to which it has become domestically driven, with a marked increase in retail ownership over the past three years, signifying early stages of the growth of an equity cult.
He points out the growing confidence of domestic investors in the long-term stability of the rupee. A stable to rising rupee would certainly only enhance the long-term argument for investing in Indian equities which remain, first and foremost, a domestic demand-driven story.
“Reflecting this relative currency stability the external accounts have become more stable. On the capital account, the recent inclusion of India in emerging market bond indices is a long-term positive and has already led to $15 billion of inflows in the last 12 months. As for equities, the long-term trend has to be for growing foreign equity inflows,” he said.
Budget and tax
With the Budget due next week, there seems to be less concern than was the case before about a potential increase in the capital gains tax rate, said Wood. “The view is that the re-elected government is unlikely to make such a move because of the reduced mandate. Still if that view turns out to be wrong, and the capital gains tax is increased materially, it will likely trigger a bigger correction than what occurred post the election,” he said.
The repatriation momentum could well continue this year given the private equity industry’s monumental pipeline of companies to sell globally, said Wood. “India’s booming market and attractive valuations, from a seller’s standpoint, makes it the best market globally for the PE industry to unload investments. On the issue of selling down equity stocks in India’s booming market, it remains the case that thus far that the surging investor demand is absorbing easily the rise in supply,” he said.
FDI pick-up
Structurally, Wood believes that FDI should pick up so long as the PLI schemes are seen to be working. FDI in gross terms was $71 billion last fiscal year. But, in net terms, it was only $11 billion, the lowest level in more than a decade. It reflects so-called “repatriation flows” as private equity and venture capital investors sold down investments in the context of India’s buoyant equity market.
“So far, the major success story is Apple moving smartphone production. Electronics is one area where it also makes macro sense to increase domestic production. Rising electronics imports clearly reflect increasingly affluent urban consumers,” said Wood.