Will The ‘Quality Bubble’ Pop In 2020? Credit Suisse’s Neelkanth Mishra On The Year Ahead

A narrow band of large caps has been driving India’s benchmark indices to new records despite the economy grappling with a prolonged slump. According to Credit Suisse’s Neelkanth Mishra, that’s expected to continue as the slowdown may worsen.

“It has been a narrow rally so far. Only a few stocks are driving the upside,” Mishra, managing director and co-head of Equity Strategy (Asia Pacific) at Credit Suisse, said in an interview to BloombergQuint. “We think this [record rally] will continue till there is economic uncertainty. What they are calling as the quality bubble is really not going to deflate.”

The top 15 stocks by market capitalisation constituted nearly 40 percent of India’s equity market value, according to a report by Credit Suisse. The situation could reverse when an industry-wide restocking cycle kicks off, resulting in a rally in lower-quality stocks that are cheap right now, he said.

For a rebound driven by broader market stocks, economy needs to recover from its slowest growth in six years. Credit Suisse, however, expects the things to first get worse.

Economic Slowdown May Worsen

The current economic slowdown is due to firms, primarily from the industrial sector, reducing their inventory levels, according to Credit Suisse. The industry—comprising mining, manufacturing and construction— accounted for nearly 64 percent of the growth slowdown since second quarter of the financial year 2017-18, it said.

Credit Suisse said certain pro-cyclical factors may continue to depress growth. The first of these is the country’s financial system, where weak nominal GDP growth can drive an across-the-board reassessment of loan viability, the report said, adding that private lenders’ loan growth, too, could take a hit. Credit Suisse said the fiscal stress at the state and central governments may force them to hold back some of the spending.

Credit Suisse Top Picks For 2020

• The brokerage firm remained ‘Overweight’ on financials, telecom and utilities with State Bank of India, ICICI Bank Ltd., ICICI Prudential Life Insurance Co Ltd., Bharti Airtel Ltd. and Power Grid Corporation Ltd. as its preferred bets.
• It was minor ‘Overweight’ on pharma and IT with Dr Reddy’s Laboratories Ltd., Lupin Ltd. and Tech Mahindra Ltd. its top picks.
• Credit Suisse had an ‘Underweight’ rating on discretionary, cement, and industrials space.

Watch | Here’s What Credit Suisse Thinks Is Driving The Market Rally