Sensex down 5,500 points in one month: JPMorgan’s top analyst decodes the sell-off and opportunities

BSE Sensex has lost nearly 5,500 points in the last one month alone as FIIs have been selling Indian stocks relentlessly for the last several months. Cumulatively, foreign investors have sold equities worth over Rs 1.75 lakh crore for seven months to April this year. Foreign brokerage JPMorgan says it is following a relatively cautious outlook for India, and suggests investors to take a bottom-up approach.

Citing a slowdown in economic growth, pressure on current account deficit due to soaring oil prices and compression in the margin cycle, James Sullivan, Head of Asia Pacific Equity Research, JPMorgan, said they are taking a relatively cautious outlook for India as a whole.

As a percentage of global asset allocation, emerging markets (EMs) have fallen down from 13% to 6% now. “A lot of that drawdown has come out of China but we have seen overall asset allocation to EMs fall and one of the things we have to be cognisant of is the environment for the consumer in different countries around the world,” he said, adding that consumption has taken a hit in many Asian economies.

One of the reasons why we are seeing the valuation premiums in India relative to the rest of the region is that major economies like China are starting to see a significant slowdown which is likely to continue going into the future, Sullivan said.

“One can still see India at very significant and high levels of economic growth. The premium that investors are going to pay for that moving forward is likely to increase because of the scarcity value of that economic growth,” he said in an interview to ET Now.

When asked if foreign investors are not investing so much in China and Russia, then should not India become a hot destination, he said it was so for the most part of the last year. The equity strategist says now that investors have a choice, they do not necessarily have to be in emerging markets.

Investing Strategy
So how should one go about investing in the current macroeconomic environment?

The analyst says investors need to take a bottoms-up approach at individual sectors at this stage, rather than an overall allocation to equities as an asset class.

One of the sectors on which JPMorgan is overweight in India is financial services. Amid heavy FPI selling, bank stocks have been amongst the worst hit despite analysts being bullish on the sector as asset quality improves. In the last six months, Nifty Bank has fallen by over 10 per cent, HDFC Bank is down by 13 per cent, ICICI Bank by 8 per cent and Kotak Mahindra Bank by 13 per cent.

“The overall credit cycle will be more benign than is currently forecast. Also, the rate increase which we saw from the RBI is theoretically conducive to higher margins and higher net interest margins within financial services companies both in India as well as globally. The fact that financial services have been underperforming in India, particularly relative to the high valuations that we are seeing for the index as a whole, creates a very strong situation for outperformance moving forward.”

Sullivan also said he and his team are bullish on rural demand in India as the overall income has gone up by 13 per cent on a YTD basis.

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