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Has D-Street’s divergence with Indian economy run its course?

Top global brokerages are getting skeptical on record-breaking Indian stocks.

Last Updated: Nov 28, 2019, 08.13 PM IST|Original: Nov 28, 2019, 07.58 PM IST
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Asia’s third-biggest economy probably grew 4.6 per cent last quarter, which would be the slowest since the first three months of 2013.
By Nupur Acharya

A slowing economy hasn’t stopped India’s benchmark equity index from climbing to a series of records this year, but this divergence may have run its course, according to BNP Paribas.

Asia’s third-biggest economy probably grew 4.6 per cent last quarter, which would be the slowest since the first three months of 2013, according to a Bloomberg survey ahead of Friday’s data release. Meanwhile, the Sensex closed at a new high Wednesday and is up nearly 14 per cent for 2019. Stocks have climbed mainly since late September, when the unveiling of a corporate tax cut boosted the outlook for corporate earnings.

“Our recent meetings with policy makers and industry experts confirmed that there is unlikely to be a significant uptick in economic data in the near term,” Abhiram Eleswarapu, the firm’s Mumbai-based head of equity research, wrote in a note. “The index rally we had cautiously called for may be done for now.”

This view echoes that of Credit Suisse, which expects the growth slump to last longer than anticipated based on its interaction with investors. “With growth continuing to fall in Oct.-Nov., it seems unlikely that FY20 would see any growth in EPS and FY21 should see meaningful cuts too,” it said in a report this week.


Investors are, however, unfazed by the economic slowdown. Net foreign buying in Indian stocks has reached $3.2 billion so far this month, set for the biggest tally since March, according to official data. The recent equity gains have also been fueled in part by hopes for a trade deal between the U.S. and China.

“The government may soon have to make the difficult choice between considerably slipping on its fiscal deficit target of 3.3 per cent of GDP in FY20 to boost growth or potentially prolonging the slowdown by halting expenditure,” BNP said.

The brokerage remains overweight on India, and favors private banks, insurers and dividend-paying public sector firms.

Here’s a roundup of other brokerage views:

Goldman Sachs
  • Overweight India as it expects the economy to recover and corporate earnings to improve next year.
  • The growth recovery is likely to be led by a pick-up in the global cycle, the impact of easing local financial conditions and recent government measures.
  • India EPS growth will rise to 16 per cent next year from 12 per cent this year.
  • Expect the NSE Nifty 50 Index to reach 13,000 by the end of 2020, implying upside of over 7 per cent from the current level.

  • While Indian stocks have underperformed in three of the last four years amid the slowdown in growth, they appear set to be the “turnaround story” of early 2020.
  • Expectations of a growth bottom and government reforms should sustain elevated nominal valuations. Relative valuations are “closer to average”.
  • JPMorgan sees a modest growth recovery in the second half of fiscal year 2020 driven by a favorable base effect, above-normal rain, government spending and impact from RBI easing.
  • Recommendations: ICICI Bank, Ultratech Cement and Ashok Leyland.

Societe Generale
  • Reforms hold the key to further gains in share prices.
  • Corporate tax reforms are bringing foreign investors back and have raised the longer term return potential of the market.
  • While the earnings trend is positive, equity valuations are higher than all major markets in the region.
  • Expect economic headwinds to start receding in the coming year.
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