Indian equities a long-term play


Indian equities as represented by the Sensex Index have clocked a return of 7.4% in rupee terms, equivalent to 7.1% in ringgit terms since March 2018.

Indian companies have posted better than expected results for the fourth quarter of financial year 2018 (FY18) and FY19, thus far.

Solid earnings and revenue growth boosted market sentiments and contributed to the recovery in stock prices.

The Reserve Bank of India’s neutral stance amid benign inflation and the uptick in Purchasing Managers’ Index data and industrial production has helped Indian equities trend higher.

The recent macroeconomic figures could mean the pain of reforms in India may have started to ease.

The better weather conditions could improve yield for the agriculture sector as consumer demand improves after the introduction of the Goods and Services Tax and the easing of the cash-crunch from demonetisation initiatives back in 2016.

An accommodative monetary policy may also stimulate lending appetite within the industrial space to revive capital expenditure growth.

India is looking at a widening trade deficit due to slower export momentum on its trade front.

Being a net importer of oil, the higher oil prices will translate to higher energy costs and strain on fiscal pocket.

Government’s spending is likely to continue to slow having breached the fiscal deficit target last year, but a recovery in consumption demand and investments could help offset the aforementioned growth anchors.

Easing reform pains and stronger economic foundation are gradually materialising as expected. These give investors a reason to look back into Indian equities.

At this juncture, we do not think India is a screaming buy simply because valuation remains fairly expensive from a short-term perspective.

As of May 31, 2018, the FY18 price-earnings (PE) multiple stood at 18.8 times, which is higher than our fair PE of 18 times.

We think investors looking for capital gains are better off with Chinese equities due to cheaper valuation coupled with commendable earnings growth.

Investors who are looking at a longer investment horizon (more than three years), now could have a good opportunity to gain exposure to Indian equities, given attractive future valuations.

FY19 PE stood at 15.5 times as at end-May, which looks attractive from our fair PE value. Indian equities are also expected to deliver robust earnings growth over the next two years.