India Set To Outperform Asia Equity Peers, Says Jefferies' Chris Wood

There is a potential for renewed outperformance by India in an Asian and emerging market context, according to Jefferies' Chris Wood.

The valuation differential between India and China has reverted to its "traditional mean after a huge 65% outperformance of the MSCI China over the MSCI India since the end of October 2022 to late January following the China reopening," Wood highlighted in his latest Greed and Fear report. 

This sets up a potential for renewed outperformance by India, most particularly, as dedicated long-only foreign investors are underweight India, the note said.

Indian domestic equity mutual fund inflows have remained positive, with a renewed pickup, said Wood, citing the most recent data. A majority of these inflows continue to come from the systematic investment plan route, where monthly inflows are debited from salaries.

Such inflows are naturally stickier than retail "punters" speculating via derivatives and represent a long-term structural positive for the stock market, according to Wood.

"The domestic demand story in India certainly remains intact to justify the continuing belief in the equity market," the financial analyst said. Wood pointed out that the loan growth has slowed but still remains solid at 15.5% year-on-year. The confidence of Indian private banks, he said, is reflected in strong growth in operating expenditure.

Meanwhile, the recovery in the Indian residential property market also continues with "satisfactory" housing affordability, despite mortgage rates rising 8.7%, Wood said.

The monetary tightening cycle is nearly done following 290 basis points of tightening since April 2022, with the policy repo rate now at 6.5%, the financial expert said.

Wood, citing the above reasons, concluded that a private sector-led capex cycle is now due given that the banking system is healthy in terms of an eight year low in the non-performing loan ratio.

He added that the corporate sector is unleveraged and profitability is rising in terms of listed companies’ return on equity. "Any pickup in private sector capex will be on top of the significant capital spending undertaken by the Modi Government in recent years," Wood added.

"In this respect, the government, in the budget announced on Feb. 1, resisted the temptation to be populist in a pre-election year."

India’s estimated fiscal deficit of 5.9% of GDP in fiscal 2024 for the central government and 8.7% if state governments are included is not as worrying as it first appears, Wood said.

This is being driven in significant part by investment as opposed to transfer payments. The previous areas of off-balance sheet government spending have also been brought on budget, thereby improving the transparency of the government accounts, Wood pointed out.

Further evidence of economic resilience and reviving animal spirits in India is the continued strong GST revenues and buoyant retail sales.

Chris Wood flagged that India's relatively high valuations continue to be a challenge. "Greed & Fear will remain slightly 'overweight' on India in the Asia Pacific ex-Japan relative-return portfolio," he said.

However, in the Asia ex-Japan long-only portfolio, which is long term by nature and less benchmark focused, a dominant 39% of the portfolio remains invested in India, Wood said.