Following the recent landslide BJP win in India, the prospect of serious reforms in the country have emboldened Credit Suisse to take an "outperform" stance on the country and its markets.
Credit Suisse is taking a more optimistic view on India’s economy and markets to “outperform” from “neutral” because of what it sees as greater chances of reforms following the emphatic victory a week ago of the Bharatiya Janata Party, or BJP.
The elections have granted new prime minister Narendra Modi the rare position of having an overall majority for one party, the first time this has been the case since 1984. High priorities for the government are legislative and administrative reforms, tax and foreign direct investment reforms, recapitalisation of certain banks and accelerated clearance of investment projects, the bank said in a note.
“We believe India is poised for a structural re-rating as the pro-growth policy agenda of the BJP is expected to bring a profound impact on India’s long-term growth outlook if the proposed reforms are implemented effectively,” Credit Suisse said.
The bank expects India’s gross domestic product growth rate to accelerate to 6.1 per cent in 2015 and 5.5 per cent this year.
India’s flagship SENSEX Index of stocks has rallied by 17 per cent so far this year, implying a forward price-to-earnings ratio on a 12-month basis of 15 times based on expected earnings in 2015, which is in line with its 10-year average but 25 per cent below the cycle peak of a PE of 20, the bank said.
“We have upgraded India to outperform from neutral to reflect its improved reform and growth recovery outlook,” it said, but it added that the Indian equity market is likely to see some profit-taking in the aftermath of the post-election rally. Investors should add to equity holdings on any such tactical pullbacks, the bank said.
To capture the effects of a structural recovery in India, the bank advises investors to hold cyclical stocks, although valuations may have become less attractive recently. It favours energy, auto, infrastructure and financial sectors.