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Jefferies pointed out that foreign investor activity has been a key pressure point for the broader stock market
Jefferies’ India has also slashed its FY25 earnings estimates for 63 percent of the 121 companies under its coverage.
In a recent GREED & fear note, Christopher Wood of Jefferies highlighted that the correction in the Indian market of late, most particularly in the small to mid-cap spaces has been triggered by the Q2 earnings season which has seen the biggest earnings downgrades for India Inc since early 2020.
On the back of these downgrades, Jefferies’ India has also slashed its FY25 earnings estimates for 63 per cent of the 121 companies under its coverage which have reported Q2 earnings results so far, also marking the the highest downgrade ratio since early 2020. According to Chris Wood, the earnings downgrades for India Inc reflect the impact of a cyclical slowdown which has been denting earnings growth.
Though concerns over earnings growth and foreign outflows may put short-term pressure on the market, domestic investor participation remains strong. Jefferies also noted a spike in equity supply in the market which has surged to around $7 billion per month, totaling about $60 billion year-to-date. This increased supply is now meeting robust domestic demand, signaling a more balanced market environment.
Banking on these levers, Wood retained his long-term bullish stance on Indian equities, albeit with some caution. He views the recent market correction as healthy, most particularly as it has impacted the most expensive part of the market.
Woods also remains optimistic over prospects for private sector banks, the relatively inexpensive pocket in the market that has recently started to outperform amidst expectations of a potential cut in the cash reserve ratio (CRR) by the Reserve Bank of India in coming months.
Jefferies’ Indian banking analyst Prakhar Sharma also highlighted that the RBI’s change of stance on liquidity, from withdrawal to a neutral position, should abate concerns for the sector. “Also the growth rates between credit and deposit growth have now converged compared with a peak gap of 400 basis points over the past year. This, along with better deposit growth and easier liquidity, should be supportive of banks’ net interest margins,” the Greed and Fear note stated.
Foreign Selling Pressure and Market Outlook
Jefferies pointed out that foreign investor activity has been a key pressure point for the broader stock market. October saw significant selling from global funds, amounting to nearly $11 billion, contributing to the Nifty 50’s 6.2 per cent decline, its worst monthly performance since March 2020. Despite this, the index has still managed an 11 per cent gain for the year so far.
Jefferies highlighted that strong domestic inflows into equity mutual funds have persisted, with current domestic flows still outpacing the growing equity supply as companies capitalise on high valuations.
Cautious Optimism and Equity Supply Trends
Jefferies’ updated strategy on Indian equities is marked by cautious optimism. While earnings growth concerns and foreign outflows may pressure the market in the short term, domestic investor participation remains robust. Notably, the supply of equities has risen to approximately $7 billion per month, accumulating to about $60 billion year-to-date. This has started to match the strong domestic demand, signalling a more balanced market.
Long-Term Bullish Outlook on India
Despite current challenges, Jefferies maintains a bullish long-term view on India. The investment bank reiterated its forecast of India reaching a $10 trillion equity market capitalization by 2030. Aashish Agarwal, head of Jefferies India, emphasised that while current valuations appear steep, they reflect India’s strong growth visibility. He credited the emergence of retail investors for bolstering domestic markets, noting that many foreign investors may find India expensive due to examining legacy sectors such as financials, consumer staples, and tech services.
Agarwal pointed out that the next phase of growth would be driven by sectors such as infrastructure, manufacturing, hospitals, and transport hubs like ports and airports. He argued that these areas still have significant growth potential and are not yet overvalued.
