The themes we would like to be invested in the current environment are largely domestic facing sectors like the capex-related power sector against global, especially since we are having strong economic tailwinds and global headwinds for slowdown in growth. In the global facing sector, we would like to be invested in India’s outsourcing stories like pharmaceuticals.
(Source: Bloomberg)
Why are investors looking at China today?
The Chinese market, which had been a darling for investors from 1990 till 2007 the GFC crisis, has got derated since, due to its real estate issues and bloated balance sheets. From a peak of ~160% Market Cap. (MC) to GDP the Chinese indices now stand at ~60% MC to GDP a staggering 60% discount to its peak, in line with its average. As against it, India is currently trading at 140% MC to GDP its peak and 130% premium on a P/E basis to China as against 100%. MSCI has been constantly raising their weightage in India from 7% 10 years ago to almost 20% today; as against this China has lost its weightage in MSCI EM from a peak of 39% to ~ 28% currently.
(Source: MSCI, Bloomberg, JM Research)
(Source: Bloomberg, JM Research)
ETMarkets.com(Source: Bloomberg, JM Research)
ETMarkets.com(Source: MSCI)
The Chinese government provided a slew of measures for the bourses as well as the real estate industry. For the bourses they provided 500 bn RMB for AMC and insurance cos to conduct stock purchases and another 300 bn RMB relending facility with lucrative interest rate of 1.75% to corporates for share buyback.
For real estate stimulus, the govt., lowered interest rates by 75 bps to 1.75% and lowered down payment for second homes by 10% to 15%. They also cut existing mortgage rates by 50bps. This led to the Chinese market rallying by 25-30% in just a week and money flowing from all over the world. India which is still the best performing market with a 1-year perspective by 25-40% witnessed a lot of outflows.
(Source: JM Research)
India Inc. F2Q 2025 results are 2-3% below expectation
After witnessing 12 quarters of strong growth, India Inc. has witnessed a 6% de-growth in profitability lead by the Energy sector which is down 52% due to lower crude prices and Gross Refining Margins. Not including the energy sector, India inc. grew 11% YoY, a cagr of 19% in the last three years, about 2-3% lower than our estimates
The earnings “misses” came in the consumer sector, Cement and Transportation (Aviation) sector
The cement Industry reported muted volume growth of flat to negative driven by prolonged and intense monsoon season coupled with post-election slowdown. Weak realization and low operating leverage, led to EBITDA/t decline of Rs200-250/t.
The consumption sector was driven by the lack of consumption demand in the urban front. Inflation of raw material prices in a tough demand scenario in palm oil, crude, tea and coffee could not be passed on consumers and hence weighted on to lower gross margins and hence stagnating profit. Expect the good monsoon and the Kharif crop to ease the demand pressure.
The earnings “Hits” came from the Pharmaceutical and industrials on the back of strong demand and telecom sector on the back of strong ARPU
Though the banking sector was neither a hit or a miss, increased provisions was the biggest concern here specially for those having higher Micro Finance Institution exposure
(Source: CapitalLine)
Will Indian Equities continue to sink?
India is seeing growth in its GDP estimates of ~7%, a strong PMI expansion both in services and manufacturing; as well a swelling Forex reserve which currently stands at US$ 690 bn. This is clearly a contrast of what is prevailing in rest of the world, making it a safer haven to its global peers however valuations of indices are 10% above their 5-year averages, 100% above EMs and 25% above global comps.
Domestic flows have been over US$ ~35 bn FYTD the highest India has witnessed in a year as a whole. FIIs overall ownership levels in Indian market to around 16.0% the lowest in 12-14 years and we expect this to improve substantially in the future. Domestic MF are sitting on Rs 1.9 lakh Crores or 6.4% of their AUM on cash and this will further cushion any major fall.
(Source: Bloomberg, JM Research, CapitalLine)
