India Strategy and More

Some titbits for weekend reading

Kotak Institutional Equities

We see increased volatility and macro risks over the next few weeks from (1) potential escalation in US-China trade issues, (2) possible ‘hard’ sanctions on Iran leading to sharp decline in Iran oil exports and higher crude oil prices and (3) possible EM contagion given Turkey’s fragile macroeconomic situation and weak macroeconomic positions of several EMs. India’s delicate macroeconomic position will be hurt by higher oil prices given oil’s large influence over CAD/BoP (currency), GFD (bond yields) and inflation (interest rates).

MARKET VIEW: UNCERTAIN MACRO WITH PLENTIFUL RISKS

The performance of the market for the rest of the year will depend on (1) strength of economic recovery (cyclical versus structural recovery), (2) level of crude oil prices, which will shape India’s macro and (3) convergence or divergence of multiples between ‘growth’ and ‘value’ stocks. Politics will also become important by the end of the year. The Indian market trades at expensive multiples (19.8X 12-month forward P/E), pulled up by the very high multiples of ‘growth’ (‘quality’) stocks. In our view, valuations of several stocks could see a de-rating in case (1) India’s macroeconomic conditions were to deteriorate on the back of significantly higher crude oil prices (US$15/bbl or more from current levels) and/or (2) earnings were to disappoint. The market perhaps believes that India’s macroeconomic situation will improve over the next few months and/or earnings growth would be strong enough to offset any macro related concerns including higher interest rates/cost of capital.

Valuations are expensive for the market as a whole
We find the valuations of the Indian market to be rich and note the significant disconnect between high equity market valuations and weak macroeconomic outlook, as can be seen in the divergence between bond and equity yields

Much more in the attached PDF compiled by Abakkus Asset Manager LLP

https://blog.abakkusinvest.com/wp-content/uploads/2018/08/WWRR-Vol.2.007.pdf