(Bloomberg) -- 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 (PA:BNPP).
Asia’s third-biggest economy probably grew 4.6% 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% 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 (SIX:CSGN), 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% 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 (NYSE:GS)
- 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% next year from 12% this year.
- Expect the NSE Nifty 50 Index to reach 13,000 by the end of 2020, implying upside of over 7% 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 (NYSE:JPM) 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.
- 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.
