Jefferies in its latest GREED & Fear note said the recent decline in foreign ownership of Indian shares is in the context of India (MSCI India USD) having suffered a 30 percentage points rolling one-year underperformance relative to the MSCI emerging markets over the past 12 months, its worst one-year underperformance since 1996. Foreign ownership is down from 22 per cent at the end of 2019 to 16 per cent, the foreign brokerage noted adding that the MSCI India is still trading at 22 times forward earnings or 25 times if financials are excluded.
Jefferies called India the best structural growth story in global equities for the long term, but noted that expectations among domestic investors are pretty high after the impressive compound annual growth rate achieved by the Indian stock market over the past 22 years.
In absolute-return terms, Jefferies believes India is going through a year of healthy consolidation. The base case, it said, is that the Indian market will continue to trade sideways for the rest of the year as mutual fund inflows continue to absorb equity supply.
“Still if continuing sideways trading is the base case for now, GREED & fear’s assumption is that there is more scope for a rally in the new calendar year on evidence of a growing pickup in growth triggered by the easing measures discussed here last month when GREED & fear was last in India, be they GST cuts and simplification or Reserve Bank of India easing. That means there is still a chance that that 10-15 per cent return target proves to be too modest,” Jefferies said.
Jefferies noted that there have been $21 billion of MF inflows in the first five months of this fiscal year starting 1 April, including $3 billion a month into the Systematic Investment Plans (SIPs) where investors put in a fixed amount monthly.
“This flow has been more or less absorbing supply running at $6-10 billion a month. Importantly, the supply is not expected to subside, barring a market collapse, with Jefferies’ India office estimating $50-70 billion of supply in the next 12 months. Clearly the attraction for corporates, as well as for exiting private equity investors, is that they can continue to raise capital at attractive valuations.
Jefferies noted that the BSE Sensex had risen by an annualised 17 per cent (14 per cent in US dollar terms) since the start of 2003 to the end of 2024, compared with an annualised return of 11.2 per cent for the S&P500 over the same period.
“Yet seven months on GREED & fear is at risk of being too bullish since the Senex is up “only” 11.8 per cent on the total-return basis since February 27. It should be noted that the call was made after the Sensex had already declined by 12.8 per cent from the peak reached last September,” Jefferies said.