Strategy: More about momentum than bad macro or good micro by Sanjeev Prasad, MD & Co-Head, Kotak Institutional Equities
More about momentum than bad macro or good micro
The sharp increase in (1) global oil prices due to escalation in the West Asia war and (2) global bond yields due to weakening fiscal positions of many DM countries has overshadowed India’s improved economic and earnings outlook. Valuations of many large-cap. stocks are at reasonable-to-attractive levels but stocks may languish. We expect decent returns at some point in time.
Global macro has worsened
As highlighted in our August 23 report titled Same old, same old until…, equity markets have started to increasingly fret about (1) high global oil prices (see Exhibits 1-4) given the continued blockade of the Strait of Hormuz (SOH), recent escalation in the Middle East conflict that may further disrupt global oil supplies and declining global oil inventories and (2) rising global bond yields due to the continued high inflation and deteriorating public finances of several DM countries (see Exhibits 5-9).
Domestic macro reasonable but faces risks from higher-for-longer oil prices
India’s macroeconomic position looks reasonably healthy with solid economic activity, strong BoP, reasonable fiscal position and manageable inflation (see Exhibits 10-13) but could face downside risks from higher-than-longer oil prices on continued disruption to Middle East oil supplies. As can be seen in Exhibit 14, India’s macroeconomic parameters will weaken significantly in our adverse-case scenario of US$105/bbl crude oil price versus our base-case scenario of US$85/bbl crude oil price for FY2027.
Earnings outlook intact so far; some downsides in consumption-related sectors
We do not see material risks to our earnings estimates from the weakening global macroeconomic outlook given the (1) broad-based economic recovery in India and (2) composition of India’s earnings with a healthy mix of external, domestic and regulated sectors (see Exhibits 15-17). We see downside risks to the earnings of consumption sectors (automobiles) from weaker-than-expected margins and higher-than-assumed fuel prices but also note upside risks to the earnings of banks from higher-than-assumed NIMs. We have assumed stable-to-lower NIMs for banks (see Exhibit 18) despite likely higher policy rates (50 bps increase by December 2026), high system liquidity and stable borrowing costs.
Momentum investing (Amen!) is the bigger issue
We find large ‘positive’ disconnect between price and value in several large-cap, stocks for a change (see Exhibit 19). However, stocks may languish in ‘value’ zone for a while as valuations have become alarmingly redundant with the proliferation of momentum style of investing with (1) inordinate focus on short-term narratives and news and (2) near-term earnings being extrapolated in perpetuity when 2-4 quarters hardly contribute anything to the fair value of any company. Most market participants seem keener on ‘positioning’ for expected incremental events, which implicitly assumes that current market prices are fair at all points in time, rather than debating price-value propositions.
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