What’s in store for investors in 2022? Here is what Credit Suisse feels
Indian equity markets may witness a de-rating in the near term owing to unwinding of monetary and fiscal stimulus measures but may continue to command a premium to pre-pandemic levels cushioned by improved macroeconomic fundamentals and corporate balance sheets.
“As we head into 2022, the world’s major central banks have started prioritising inflation control over growth acceleration. Unwinding of monetary policy support and reduction in fiscal support in the upcoming year may have negative repercussions for global growth as well as equity valuations,” said Jitendra Gohil, head of India equity research at Swiss investment bank Credit Suisse.
However, India remains in a sweet spot – as it has been over the past few years – owing to substantial improvement and structural appeal of the Indian economy. This is demonstrated by the spectacular run in Indian equities, with the MSCI India index returning 39.8% since the beginning of 2020 in dollar terms compared with 17.9% of the MSCI Asia-ex-Japan index.
Credit Suisse is telling investors to approach 2022 with caution. It also anticipates a gradual increase in the cost of capital, which may lead to a higher expected risk premium for equities as an asset class compared to the previous two years.
“The investment case in 2022 for equities purely hinges on whether earnings growth – including buybacks – will be sufficient to withstand the twin blows of some macroeconomic slowdown and a higher interest rate environment,” Gohil said.
“Any valuation contraction in 2022 should be limited and we may not see a sharp decline in valuation multiples. Nevertheless, the Omicron variant of the coronavirus is fast spreading and could lead to a macroeconomic slowdown and consequently hurt earnings growth. Thus, our House view remains ‘neutral’ on Indian equities,” Gohil added.
Macro momentum likely to accelerate
While Credit Suisse’s consensus forecasts underestimates India’s medium-term GDP growth potential, it expects GDP growth to surprise on the upside driven by a sharp improvement in the real estate sector, infrastructure de-bottlenecking, introduction of production-linked incentives (PLI) schemes, higher-than-expected tax collections, and rising private capex spending.
“India’s FY22 and FY23 consensus GDP growth forecasts have been revised upward in the past few weeks, and we see further scope for upward revisions. While we expect the Reserve Bank of India (RBI) to tighten liquidity conditions gradually and hike rates by 50–75 bp in FY 2023, the overall macroeconomic momentum should sustain,” Gohil said.
India commands a much higher relative return on assets (ROA), observed Credit Suisse. The valuation has direct correlation to the level and acceleration of ROAs as well as growth, and India ranks among the top countries in these three parameters.
Further, corporate financial leverage has declined materially. In terms of growth, the Nifty EPS is expected to accelerate materially in the next couple of years, much higher than countries in its peer group.
“Given these fundamental shifts, we expect India’s equity market to continue to command a higher-than-historical average valuation and a relatively high P/E premium versus peers,” said Gohil.
Nifty’s bottom-up analysis
The Nifty index currently trades at a 9.3% higher valuation compared with its last five-year average. However, Credit Suisse expects nearly a third of the Nifty constituents (accounting for 35% of Nifty index weight) still offer valuation expansion potential.
The investment bank also notes that 38 out of 50 Nifty companies (around 76% of the overall Nifty Index weight) will likely see ROE expansion in the next two years versus the pre-COVID three-year average.
“There are several companies – with high valuations – that were added to the Nifty index over the past three years, and more new-age or internet-based companies get added to the index in the future, Nifty valuation may naturally look much higher than the historical average as India is experiencing an acceleration in the start-up revolution,” Gohil said.
Prefer domestic cyclicals within large caps
Credit Suisse believes that infrastructure, cement and industrial companies to offer valuation expansion potential ahead of the Budget 2022.
Further, domestic cyclicals such as private banks and large public sector banks remain its preferred picks owing to expectations of higher GDP growth.
Credit Suisse also maintains a moderate overweight position in mid-caps and prefers emerging structural themes that may offer better alpha-generation opportunities relative to their large-cap peers. Some of these themes include technology, active pharmaceutical ingredients, and housing market as well as housing finance developers.
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