In the backdrop of rising rates and soaring crude prices, one question that keeps investors guessing is how much the stock market can rise in coming years? Well, one hint is provided by Christopher Wood, global head of equity strategy at Jefferies.
A target of Sensex at 1,00,000 is now eminently achievable in five years. To arrive at the one lakh target for Sensex, Wood made two assumptions that include a 15% EPS growth and an earnings multiple of 19.4 which is also a five-year average. The ‘Greed and Fear’ report, authored by Wood, predicts Sensex will hit 1,00,000 during FY27 or sometime in late 2026. On February 4, Sensex closed at 58,645.
Wood explains his bull view on India by citing strong growth based on high real GDP growth, buoyant tax revenues, consensus street view on strong earnings growth in FY23, India's resilient macro, stable currency and improvement in the housing sector, hinting a revival of broader capex cycle.
Wood strongly believes that the Indian stock market is apt for growth investors and it deserves higher earnings multiple. The report states- “In a G7 world where value investors may finally enjoy an extended period of outperformance over growth, until at least the Fed performs another U-turn, India should be a prime object of focus for growth oriented equity investors, be they Asian and emerging market investors or global investors.”
The report highlights accelerating India's growth story and its reflection in rising earnings forecast. It states that India is set to record the best earnings growth in Asia this year with only Indonesia and the Philippines higher in terms of consensus forecasts. The consensus earnings growth forecast for MSCI India this year is 20.3%, compared with 11.3% for Asia ex-Japan region, the report adds.
Keeping high hope on improvement in housing cycle, the report extrapolates, “if the current housing upturn proves to be the lead indicator of a broader private sector capex cycle, as was the case in 2002-03, then India should once again become one of the best performing stock markets in Asia as it was between 2003 and 2007.” The MSCI India rose 599% in US dollar terms between 2003 and 2007, the second best performer in Asia after Indonesia during this period.
The report cited two main risks to Indian equities and stated both are external. One is soaring crude prices and another is rate hikes by the Federal Reserve. Wood cautions global emerging market investors to hedge Indian equity exposure by owning energy stocks elsewhere, most particularly Russian energy stocks. He advises investors to keep 20% energy stocks in the Indian portfolio. The Greed and Fear model portfolio consists of Reliance and ONGC and both were assigned a weight of 10% each.
The report highlights the role of domestic flows in maintaining higher levels of indices. Net inflows into domestic equity mutual funds totalled $22.2 billion since March 2021. The stock market has corrected mere 5.1% since peaking in October with foreigners having sold a net $4.8 billion of equities in 2022 (up to Feb 01). But the market would have suffered much more were it not for continuing healthy inflows into domestic mutual funds, the report says. Wood remains of the view that externally driven corrections are buying opportunities in Indian equities.