Credit Suisse strategists do a SWOT analysis of Indian stock market in H2

As investor focus shifts from inflation to recession, Credit Suisse analysts say the second half (H2) of the calendar year 2022 could turn out to be better with a 9 per cent decline benchmark Nifty50 index witnessed in H1.

"In a portfolio context in India, we maintain our mild overweight position in the midcap sector, as we see several structurally positive investment opportunities in areas such as staffing, entertainment, chemicals, real estate, defence, which we find attractive," Jitendra Gohil, Head of India Equity Research, Credit Suisse, said in a report.

The global brokerage has told investors to remain defensive in the near term and focus on domestically exposed companies that could benefit from easing cost pressures. Its preferred sectors in the near term include healthcare, fast-moving consumer goods, autos and financials.

The two sectors on which Credit Suisse has maintained a bearish outlook are IT and metals.

The equity strategists are less concerned about India’s macro fundamentals, which, they said, remain solid but are cautious about the global geopolitical situation and aggressive tightening by major central banks in the near term.

Nifty’s 12-month forward price-to-earnings (P/E) ratio of 17.6 has fallen toward its 10-year and 5-year (pre-COVID) average of 16.9.

Gohil said while the froth in Indian equities has settled, it is still not inexpensive enough and they do not rule out bouts of sharp corrections in the coming weeks and months. "Nevertheless, we are positive on India’s medium-term outlook and its relative attractiveness compared to other geographies. Once oil prices start to fall, we expect FPI outflows to abate. We, therefore, suggest that investors use this correction as a buying opportunity in select sectors," he said.

Earnings outlook
Credit Suisse analysts say downside risks to earnings growth are emerging as business and consumer confidence have been hit by aggressive central bank tightening. Also, persistently higher inflation is leading to demand destruction. "Within India too, lower-end consumption specifically has seen marked deterioration. Nevertheless, we expect cost pressures to ease in H2, which may partly offset the reduction in overall top-line growth. Hence, we expect 4–5 per cent EPS cuts to Nifty consensus earnings estimates for the next couple of years," they said.

The key risk, however, remains slower topline growth in the next few quarters, Gohil said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)