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Chris Wood hikes allocation to Indian equities; raises stake in HDFC

In his latest note to investors, GREED & fear, Christopher Wood, global head (equity strategy) at Jefferies said that he has hiked allocation to Indian equities in his Asia Pacific ex-Japan relative-return portfolio by one percentage point and added two percentage points to the existing investment in HDFC in the Asia ex-Japan long-only portfolio. At 2x 12-month forward adjusted book, compared with a five-year average forward price-to-book ratio (P/BV) of 2.6x, Wood feels HDFC’s valuation remains attractive.

“The home financing story is more straightforward given the surge in affordability courtesy of lower interest rates and the prolonged correction in residential property prices. HDFC is the standout name in this regard and looks poised to take significant market share as more distressed lenders in this space have been forced to curtail activities, which is why GREED & fear has increased its weighting from 4 per cent of the Asia ex-Japan long-only portfolio to 6 per cent,” Wood wrote.

Among Indian stocks, besides HDFC, Wood also holds Reliance Industries (RIL), Maruti Suzuki, SBI Life Insurance, ICICI Lombard General Insurance, DLF and Cipla in his Asia ex-Japan thematic equity portfolio for long-only absolute-return investors.

Analysts at Morgan Stanley, on the other hand, are trading with caution on the financial sector and suggest the sector could lose its leadership status in any new bull-market given an over-owned position. “Non-banks face significant growth slowdown. We think a stimulus package is essential, but the sector’s performance could narrow to a handful of strong banks. We are sellers of a rally in financials,” wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in an October 9 co-authored note with Sheela Rathi.

Buy on dips

Going ahead, Morgan Stanley believes, policy measures adopted by the government will go a long way in attracting foreign flows into equities. However, the market’s performance in the near-term remain hinged on global factors, which they feel, will keep them choppy. India, Morgan Stanley said, needs to continue to deliver policy that lifts its potential growth in the eyes of market participants.

From the lows of March 2020, the benchmark indices – the S&P BSE Sensex and the Nifty 50 – are already up nearly 53 per cent each and have outperformed emerging markets (EM) since April beginning. Three factors – a differentiated policy response, strong corporate action through the pandemic and an attractive starting point of relative valuations, said analysts at Morgan Stanley – have helped India achieve this feat.

“We remain buyers of any correction that stocks may offer, as valuations are attractive relative to macro aggregates. The broad market will likely outperform, consistent with our theme that this is a stock pickers’ market. Prefer cyclicals over defensives. The themes we like include agriculture, manufacturing and early cycle rate plays,” Desai and Rathi said.

As their base case, they expect the S&P BSE Sensex to be around 37,300 mark by June 2021, which is nearly 6.5 per cent lower compared to the current levels. “Our June 2021 target implies a S&P BSE Sensex forward P/E multiple of 17x and a trailing P/E of 23.6, a 15 per cent discount to the 25-year trailing average of 19.7x, given that F2021 earnings are likely to be very depressed,” Desai and Rathi wrote. In their bull (30 per cent probability) and bear case (20 per cent probability), Desai and Rathi expect the S&P BSE Sensex at 45,000 and 28,000 levels, respectively.

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