The party’s over for Indian equities, with stocks headed for another tough year as a shrinking global cash pool dims prospects of an improving economy and expected recovery in company earnings boosting stocks, according to Bank of America Merrill Lynch.
“Imagine you are at a New Year party and happy to find out that there’s more room to dance but suddenly you realise that’s because everyone is leaving and the
music has stopped,” Sanjay Mookim, BofAML’s India equity strategist, said at his office in Mumbai. “Indian equities are somewhat like that at the moment,” he said.
Financial-system liquidity is being eroded as central banks globally trim balance sheets, stoking concerns that investors may shy away from riskier assets such as equities. Overseas investors withdrew $4.6 billion from Indian stocks in 2018, the most in a decade, even with the economy and company profits seen to be recovering from the introduction of a disruptive national sales tax and a currency ban.
Still, purchasing by local funds made India the best-performing equity market in Asia last year, outperforming even the US and the MSCI emerging markets index in local currency terms and leapfrogging Germany to become the seventh-largest in the world. The MSCI India Index trades at 17.2 times its estimated 12-month earnings, about 59 percent higher that the MSCI Emerging
“The expansion of multiples that has happened is not because the market has discovered growth, it has happened because of the lower cost of capital everywhere and that seven or eight
year trajectory has turned,” Mookim said. Share prices have rallied far ahead of earnings estimates in the last few years and Mookim expects them to give up some of those gains as liquidity starts tightening.
Even as BofAML expects India’s NSE Nifty 50 Index to end 2019 at 11,300 — a 4 percent gain for the year — it won’t be a smooth ride. The key equity gauges may fall by “a double-digit percentage” in the first half, possibly triggered by political rhetoric preceding national elections expected around May, before stabilising with the formation of a new government.