Synopsis: Healthy Market Correction, Jefferies' Chris Wood views the recent correction in Indian stock markets, especially among high-value stocks, as a healthy sign. Meanwhile, more affordable private sector banks are beginning to outperform. Significant earnings downgrades, the Q2 earnings season has seen the largest earnings downgrades since early 2020, with Jefferies revising FY25 earnings forecasts for 63% of companies under its Indian coverage.
In his latest 'GREED & Fear' note, Chris Wood, Head of Global Equity Strategy at Jefferies, characterized the recent correction in the Indian stock market as a necessary adjustment, particularly affecting the most expensive stocks.
This correction has also provided an opportunity for private sector banks, which are relatively more affordable, to demonstrate improved performance.
Wood highlights that these private banks are now showing signs of potential growth, largely driven by expectations that the Reserve Bank of India (RBI) may reduce the cash reserve ratio (CRR) in the coming months.
Jefferies also noted that the recent Q2 earnings season has resulted in the most substantial earnings downgrades since early 2020.
The firm’s India office has cut its FY25 earnings forecasts for 63% of the 121 Indian companies under coverage that have reported Q2 earnings so far, a downgrade ratio last seen in early 2020.
This shift reflects an anticipated cyclical slowdown, which is evident from high-frequency data analysed by Jefferies' Economic Indicator (JEI).
The JEI, a comprehensive tracker of the Indian economy based on 35 monthly indicators, rose by 4.3% year-over-year in September.
This reflects a slight recovery from a three-year low of 2.6% YoY in August but remains 0.6 percentage points below the year-to-date average.
Jefferies believes this recent improvement may indicate a moderate economic rebound, though underlying signals suggest a sustained cyclical slowdown.
Furthermore, Jefferies' Indian banking analyst, Prakhar Sharma, suggested in a recent report that the RBI’s shift from a liquidity withdrawal stance to a more neutral approach should alleviate concerns about banking sector stability.
Sharma noted that the disparity between credit and deposit growth rates, which peaked at 400 basis points over the past year, has now closed.
This convergence, alongside improved deposit growth and liquidity, is likely to support banks' net interest margins, making private sector banks an attractive investment in the current market scenario.
The broader market indices have also reflected this correction, with the Nifty index down by 9.4% from its peak in late September, while the Nifty MidCap 100 Index and Nifty MidSmall Cap 400 Index declined by 10.2% and 9.7%, respectively, from their September highs through late October.
Despite these market fluctuations, domestic equity mutual fund inflows remain strong, driven by a continued interest in Indian equities.
Jefferies reported that total domestic inflows into equities are, at present, outpacing the growing supply of equities.
This high supply of equities, estimated at around $28 billion (or $7 billion per month) from July to October, is a reflection of companies capitalizing on high valuations.
For the calendar year to date, the equity supply has reached a total of $60 billion, indicating a solid market appetite for Indian equities.
In conclusion, Jefferies’ Chris Wood interprets the recent market correction as a favourable reset, particularly as it has impacted higher-valued stocks while allowing relatively inexpensive sectors, like private sector banks, to shine.
The market has seen a cyclical slowdown, with substantial earnings downgrades marking the Q2 season.
However, positive signals from the RBI, a stabilization in credit and deposit growth rates, and strong domestic inflows into equity mutual funds suggest a balanced outlook for the market.
Investors, however, are encouraged to approach cautiously given the ongoing cyclical adjustments.
Disclaimer: The information provided here is intended for informational purposes only and should not be taken as investment advice. Readers are advised to consult with a qualified financial advisor before making any investment decisions.
