JP Morgan upgrades Sensex to overweight
Mumbai: After a rash of downgrades and dismal growth forecasts, there is some good news with American investment bank JP Morgan on Thursday upgrading domestic equities to "overweight" from "neutral", primarily due to the massive fall in the crude prices as well as the rupee.
Citing a number of factors including historic valuations, expectations for monetary stimulus, lower oil prices, and a weak rupee, the investment bank said in a report that "it is overweight on private banks, IT services, and health care, but is underweight on consumer discretionary, energy and materials".
In the report, its emerging market equity strategist Adrian Mowat said, "lower oil price helps the current account deficit economies of India and Turkey. Therefore, we are upgrading these countries to overweight."
Easier monetary policy plus CPI greater than PPI are consistent with an upgrade cycle, the report said, adding the monetary policy has a delayed effect so the cycle may be late 2012 and markets discounting in Q3 of 2012.
Citing reasons for its upgrade, the report said, the market appears to have priced in most of the negatives already. MSCI India forward P/E is 12 times the Sensex value now, which is one standard deviation below its 10-year average.
However, the I-bank has not put a target for the Sensex.
Noting that economic growth was the slowest since 2003 in FY12, when the GDP slipped to a 6.5 percent, and the April factory output was flat after being negative in March, the report said with the falling crude, (which was trading today at USD 91 a barrel,) will offset a lot of issues facing the country.
The report pegged the current account deficit at 4.6 percent of GDP for FY12, which was just 2.7 percent in FY11.
It, however, noted that confidence in government policy and its ability to implement reform is low and that the current environment is clearly poor.
It can be noted that Sensex was the worst performer in 2011 with a massive drop of 24 percent over 2010, while despite the recent rally, it is still over 10 percent down from 2011 levels.
Secondly, the report said monetary stimulus should result in acceleration in growth in late 2012. The RBI cut repo rate by 0.50 percent in April. It has also cut banks' cash reserve ratio by 1.25 percent in 2012.
On the rupee, JP Morgan said the real depreciation of the Indian currency is equivalent to a 1 percent cut in the repo rates and noted that the rupee fall since March is equivalent to 1 percent of rate cuts.
"Our proposition is that an upgrade cycle starts late 2012. This will be driven by lower oil prices as the rupee price of Brent (oil) is 18 percent below its 2012 peak. Oil is a third of imports.
"A lower current account deficit reduces country risk. Lower oil also reduces fiscal deficit due to reduction in subsidies of PSU oil companies," Mowat said.
Last year, the oil import bill had touched USD 155.6 billion, dragging the trade deficit.
Also, the weak rupee will be the second driver of a lower current account deficit, he said.
On the banking stocks, JP Morgan said, the private banks showed strong growth in the revenues driven by the continuing loan growth momentum.
This was mainly contributed by the retail segment which also improved in the asset quality. However, the fee growth was muted due to the economic slowdown.
The PSU banks showed improvement in the pre-provision profit with higher margins, partly offset by the weak fee income.
However, the credit quality remained weak for the PSU banks with increasing delinquencies driven by restructuring and economic slowdown.