Credit Suisse Is Betting On These Sectors For 2023

Domestic cyclicals including financials, cement and construction stocks present better prospects in the coming year, according to Credit Suisse.

A revival in credit growth, prospects of better net interest margins, low FPI ownership, low imminent risk of rise in credit costs and a large valuation discount makes PSU banks favourites over private banks, it said in its Indian Market Strategy report.

However, the global investment bank and financial services company remains overweight on both, it said.

“We also continue to be overweight on cement despite the negative impact of USD/INR, primarily due to the expected turnaround in construction.”

Credit Suisse is underweight on IT, industrials and metal stocks for 2023.

The agency prefers staples over discretionary, “despite the former being expensive, with growing evidence of low-income job creation improving incremental news flow”, it said.

While it doesn't see substantial declines in IT earnings, it expects stocks to fall 10-27% in the event of a U.S. recession.

The unwinding global supply chain bullwhips could weigh down on metal prices, it said.

According to Credit Suisse, the underweight rating on both discretionary and industrials is on account of valuation concerns. Specifically in terms of industrials, the momentum—once driven by strong state and private capex—has mostly been priced in, it said.

While Credit Suisse is constructive on forward earnings, “15% gains from rolling-forward, may set the ceiling for market returns over 2023”, it said. “Cuts to globally exposed sectors should be offset by upgrades to sectors like financials, but large upgrades are unlikely.”

"Given all the uncertainties, there is a preference for large caps... The preference for me would also be the large caps," Neelkanth Mishra, co-head of India Securities Research at Credit Suisse, told BQ Prime's Niraj Shah.

"On mid caps, I think the advantage is that fundamentally they are less exposed to the world. They're much more exposed to India. Earnings-wise, they should be better off."

However, Mishra is apprehensive that in a time of uncertainty, the risk appetite weakens and tends to affect mid-cap price to earnings ratio a lot more. As mid-cap investors find other asset classes becoming more attractive, "it is possible that mid caps and small caps continue to drift lower," Mishra said.

Underlining the significance of domestic flows in the Indian equity market, Credit Suisse expects support from sources at home. Domestic institutional flows at $40 billion in 12 months are now substantially larger than FPI flows, which has declined to nine-year lows.

“We believe the ongoing rebound in FPI inflows may be short-lived (ending once the China market rebound is over), given that they mostly occur via global/regional funds: falling global growth would hurt risk appetite,” the report said.

Of the major parts of DII flows, Credit Suisse expects insurance levels of $12 billion over the past 12 months to sustain. The re-balancing nature of flows from insurance can be offset by improving penetration, it said.

The Employee Provident Fund Organisation’s share of equity AUM now stands at 13%, and with growth in the formal workforce and corpus, these can add $7-8 billion per year, it said.

SIPs in mutual funds can add another $18-20 billion per year. However, non-SIP equity investments will continue to moderate, considering the equity risk premium is now negative and the real-estate market is improving, it said.

“Overall, we expect flows to support the market, though it remains vulnerable to global shocks,” the report said.

According to Mishra, on the economic front, India is in a strong position, though external pressures are a concern.

"Domestic drivers of growth are very much intact. Fiscally, the higher tax to GDP [ratio] gives a lot of comfort to people. The inflationary pressures are also easing," he said.

In terms of external pressures, he mentioned slowdown in exports. "The reason for being worried about balance of payments has shifted from high energy prices to weak exports as well as potential risk of capital outflows," Mishra said.

In its forward-looking report, the agency termed consensus estimates as “too conservative”.

“While the substantially higher three-year CAGR in several concurrent indicators may be biased towards the formal economy, growth in energy demand, which tends to lag GDP growth due to improving energy efficiency, also suggests the current pace of output is several percentage points above current consensus," the report said.

The agency highlighted green shoots in low income consumption, as the services economy normalises. The sharp drop in government cash balances suggests bottlenecks in government spending are easing too, it said.

“The lagged effect of rate hikes, a sharply slowing global economy and the need to bridge the balance-of-payments deficit mean that the growth momentum may fade. However, it would still be higher than the current consensus forecast of 6% GDP growth in FY24,” Credit Suisse said.