Equity benchmark indices set for rebound, say analysts

Analysts believe that the $3 trillion market positioning will bounce back after a key Indian stock benchmark is about to notch its longest stretch of monthly losses in more than two decades.

The NSE Nifty 50 Index is on track for its fourth straight month of decline, its worst losing streak since 2001. The index has lost 9% of its value in the span, compared to a gain of 3% in the MSCI Asia Pacific Index.

After outperforming the past two years, Indian stock prices are Asia's worst performers in 2023 due to concerns over monetary policy tightening and weak sentiment due to the value erosion at the Adani Group. The stage is set for a rebound thanks to cheap valuations and strong domestic support, according to a number of strategists.

Adani Turns to Bane From Boon for India's Swelling Stock Market

Mark Matthews, head of research at Bank Julius Baer Co, believes that the recent underperformance is purely mean reversion after India's stellar outperformance last year, especially relative to China. There is no rational explanation for the positive trend in India over the long term. After recent underperformance, Relative valuations have become more attractive, according to Citigroup Inc. analyst Surendra Goyal. The Nifty is trading at 17 times one-year forward earnings, which is less than its five-year average of 19 times.

While the growth outlook remains mixed, we note that Citi economists expect India to be the fastest growing large economy in 2023, Goyal wrote in a note earlier this month. We think there will be a limited impact on India due to the recent global banking turmoil. The high premium enjoyed by Indian stocks over Chinese peers has narrowed as well. The ratio of the MSCI India Index forward earnings valuation to that of the MSCI China Index has fallen to 1.4 compared with its five-year average of 1.7.

Christopher Wood, global equity strategist at Jefferies Financial Group Inc., wrote in a recent note that this is another trigger for outperformance by Indian stocks, along with continued strong domestic demand and the end of the local central bank tightening cycle.

Morgan Stanley upgraded Indian equities to equal weight this week on benefits from their shrinking valuation premiums versus emerging-market peers as well as the resilient local economy.

Indian equity markets are seen as calm thanks to large inflows from local investors, despite concerns over geopolitics and bank stability rattling markets around the world. The India VIX measure of stock volatility has declined over the past year and is more than five points below the Cboe VIX.

Aditya Suresh, head of India research at Macquarie Capital Ltd, said domestic liquidity is still supportive and has been supportive of the story of India for the past two years. Domestic investors have been holding the market together. Foreign investors are on track to be net buyers of Indian shares for the first time since November. They have purchased a net $1.4 billion so far in March.