Why Credit Suisse Sees Quicker Recovery For India, Global Markets

Credit Suisse remains overweight on emerging markets including India on optimism that global growth will return to pre-crisis levels much quicker than 2008-09 financial meltdown.

The investment bank is “highest conviction” overweight on emerging markets including Thailand, Korea, Brazil and India, Andrew Garthwaite, managing director and global equity strategist in the investment banking division at Credit Suisse, said in a report. It cut China to “small” overweight.

For India, the rare upgrade in the consensus earnings per share estimates for FY21/22 in the second-quarter will continue, Neelkanth Mishra, managing director, India strategist and co-head of equity strategy, Asia Pacific, said in a separate report. The rebound, he wrote, has been aided by restocking of supply chains, reversing the destocking seen in FY20, and may not be done yet.

The optimistic forecast comes as India has nearly removed all restrictions after imposing one of the harshest curbs earlier in the year to contain the Covid-19 pandemic. The nation’s GDP contracted nearly 24% in April-June, the worst among major economies. But while Asia’s third-largest economy is on track for a first full-year contraction in decades, economists expects the GDP to decline lesser than what they earlier forecast.

Mishra wrote in his report that fiscal comfort and improving government payment timelines should help in a rebound in earnings. While only three firms saw sales growth of more than 30% in the second quarter, operating profit grew over 30% for a third of the companies, proving that the improvement in margins is broad-based, he said.

Credit Suisse is overweight on banks (State Bank of India and Axis Bank Ltd.) and metals (Tata Steel Ltd.). It’s underweight on industrials and cement.

Credit Suisse forecasts global GDP to grow 4% in 2021, well above trend, aided by monetary policy. Global GDP growth should return to pre-virus levels by mid-2022, Garthwaite wrote. The return to pre-recession levels will be much quicker than post the global financial crisis, and has already resulted in a V-shaped recovery in U.S. GDP, he said.

Garthwaite expects a 15% rise in global equities by the end of 2021. The fundamental support will come from monetary policy, the equity-risk premium and the beginning of a bond-for-equity switch. In the near term, earnings revisions and excess liquidity are supportive, he said, adding that tactical indicators suggest a pause in the rally but may not lead to a correction.

While inflation expectations are expected to rise, he said the U.S. Federal Reserve will cap any disruptive rise in bond yields. He sees U.S. 10-year hitting 3% by end-2022 (from 1.72% now), with the key drivers for inflation being:

• Much more loose monetary policy than the 2008-09 crisis.
• Money supply growth that leads inflation in two to three years.
• Many dis-inflationary factors reversing or diminishing (deglobalisation, rising oil, less impact from disruptive technology and a greater focus on minimum wages).
• The dollar likely to remain in a bear market.