Better valuations, lower oil prices will make Indian stocks attractive

Credit Suisse said on Thursday that Indian stocks would look attractive if oil prices fell or valuations straightened further.

Earlier this month, Credit Suisse lowered India’s ratings while increasing its weight to China.

Speaking at Credit Suisse’s Asian Investment Conference, Dan Veneman, co-head of Asia Pacific, Securities Research, Credit Suisse, said the brokerage would like to upgrade India if the opportunity presents itself.

He said the credit and property cycles are in good standing.

India has been in a severe real estate recession for the past decade. The bank credit cycle bottomed out around 2018 after bad loans started exploding a decade ago.

“The banking sector is now ready to expand its balance sheet. Property prices are cheap compared to income. From a 3-5 year perspective, there is likely to be a very good growth story for India,” said Veneman.

However, the ratings are quite steep. And there is no momentum in terms of earnings upgrades in the near term. And oil prices are on the rise.

“The elephant in the room is oil prices. If we have a negotiated settlement in Ukraine and oil prices are down between $80 and $90 a barrel, India looks much more attractive. Higher oil prices make everything worse in India,” said Veneman.

He said high oil prices were exacerbating inflation, which is already a problem.

“It exacerbates sensitivity to a Fed rate hike because India has to import more foreign capital to balance its balance of payments. What will make us turn positive in India will be two things, either singly or together. It’s a better valuation or a better oil price.”

Regarding China’s growing weight, Feynman said China has a moderate oil import bill even though it is a net importer.

“It’s the import bills that can be controlled. China’s reliance on exports is lower than most other markets in the region, which means policy makers have more room to maneuver.”

Despite the recent volatility, China usually acts as a low volatility market, with a low beta market.

“If we look at the two declines in the recent past, the global financial crisis (GFC) and the first two months of COVID. China has held out for most markets. We have an ambitious overall GDP target. China always achieves or beats that target,” said Veneman.

However, Credit Suisse said it still had some concerns as earnings revisions remained weak in China despite improving overall indicators.

“This is a potential indicator of low-quality GDP growth. If GDP is delayed due to infrastructure spending with low economic returns,” Veneman said.

Veneman described Chinese Vice Premier Liu He’s recent statement on policy measures to support stock markets as highly positive.

“If nothing else, it shows the government’s interest in stocks. That government views stocks as an important economic variable, an economic tool. It says Beijing supports us. This is a positive sign.”

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