A cut in corporation tax rate by the government on Friday has made even foreign investors sit up and take notice. While most brokerages have revised their calendar and fiscal year-end targets for the frontline benchmarks, foreign investors too have started to rejig their equity exposure.
Christopher Wood, global head of equity strategy at Jefferies has hiked his exposure to Indian equities by 3 percentage points (ppt) following the government’s announcement to slash corporation tax to an effective 25.2 per cent from the earlier 35 per cent.
The move, Wood wrote in GREED & fear – his note to investors, came as a total surprise and shows the benefits of one political party dominating the legislature. It also highlights the Modi government finally responding in earnest to the extreme slowdown in growth in recent months.
“GREED & fear advises equity investors to celebrate tax cuts now and leave worrywarts to worry about fiscal deterioration. GREED & fear will, accordingly, raise the weighting in India by three percentage points in the Asia Pacific ex-Japan relative-return portfolio and reduce it in Indonesia by two percentage points and take one percentage point from China,” Wood wrote.
In August 2019, he had trimmed his exposure to India by 1ppt amid fading hopes of a stimulus by the government amid a tottering economy, sub-par corporate earnings and the sudden focus on Jammu & Kashmir (J&K) that added an additional negative to the Indian narrative.
Besides Wood who has increased his exposure to Indian equities, Nomura has revised its Nifty50 target for March 2020 to 12,545 on the back of a potential 7 per cent earnings increase in FY20/21. This translates into a gain of around 9 per cent from the current levels. However, it does caution against the sharp run-up seen post the announcement on Friday that saw the S&P BSE Sensex gain 1,921 points by close of trade.
“We see limited scope for valuation expansion, and the stock price rally after the tax cut announcement has already factored in the potential earnings impact,” wrote Saion Mukherjee, managing director and head of India equity research at Nomura, in a recent co-authored report with Neelotpal Sahu.
Those at Goldman Sachs, too, remain bullish on the road ahead for the markets have revised their 12-month Nifty target to 13,200 from 12,500 earlier.
“With recent growth-supportive announcements, the boost to corporate earnings (from an already region-high forecast) and likely better sentiment, the positive investment case on India (relative to the rest of the region) has strengthened further. We continue to like domestic cyclical sectors like banks (both private and public sector), industrials and autos, which are best positioned for a cyclical upturn,” their analysts wrote in a report.
Ridham Desai, India equity strategist at Morgan Stanley also shares a similar view and has raised his June 2020 S&P BSE Sensex target to 45,000 from 40,000 earlier. Rate cuts, privatisation, FPI limit increase, sovereign bond issue and forthcoming growth prints are the key triggers in Morgan Stanley’s view that will drive the markets from here on.
“We now raise our FY2021 earnings growth estimate from 20 per cent to 23 per cent. We expect India's earnings growth revisions, in terms of both depth and breadth, to turn sharply positive after almost nine years of downgrades,” Desai wrote in a recent co-authored report with Sheela Rathi.
As an investment strategy, Nomura has increased their overweight stance on financials, which they believe will be driven by the potential positive impact on earnings and return on equity (RoE) that should drive up the valuation multiples going ahead. Healthcare, utilities, infrastructure & construction are the other sectors Nomura is overweight on.
| Country | MSCI AC Asia Pacific ex-Japan weight (Sep 20, 2019) |
|---|---|
| China | 31.3 |
| Australia | 17.3 |
| Korea | 11.8 |
| Taiwan | 10.9 |
| Hong Kong | 8.8 |
| India | 8.3 |
| Singapore | 3.1 |
| Thailand | 2.8 |
| Indonesia | 2 |
| Malaysia | 2 |
| Philippines | 1 |
| New Zealand | 0.6 |
| Pakistan | 0.03 |
All figures in %
Source: GREED & fear, Woods weekly note to investors