Equity Strategy: Infrastructure Outperformance Taking Shape
BMI View: While we are bearish towards the benchmark Sensex index, we continue to see attractive investment opportunities across Indian infrastructure equities. This sector remains depressed in terms of price and valuation and is likely to outperform over a multi-year time horizon as India's investment cycle gradually turns up (early signs of which are already appearing). We believe that the BSE Capital Goods Index, in particular, is set for major upside over the medium term, as financial risks dissipate and earnings prospects improve in 2014.
Since early November, BMI has been outright bearish towards India's Sensex index, the benchmark listing of the country's 30 largest companies by market capitalisation. Our rationale for adopting this view was both technical and fundamental in nature. Technically speaking, market momentum had started to wane and the bourse appeared to be carving out a major triple top reversal pattern ( see chart). Fundamentally, despite a backdrop of sluggish economic growth, the Sensex was amongst the most expensive indices across the region, trading at 18.4x trailing earnings and 2.6x book value. Little has changed since then for us to reassess our downbeat stance. We are currently up 1.7% in our regional asset class strategy, and see scope for further downside in the Sensex over the coming months towards trendline support at 18,500 (which would represent implied losses of 9.4% from current levels).
That said, we also reiterated at the time that the Sensex is not the be all and end all of India's equity market. In fact, in our strategy note 'Can The Sensex Continue To Defy The Odds?' dated November 1, we championed the case for infrastructure stocks. This sector was not suffering from the valuation premium seen in the benchmark bourse; on the contrary, it was trading at a historical discount. To be sure, the BSE Capital Goods Index has been on a tear, clocking spectacular returns of 40.4% since its August 28 low.
|India - Benchmark Sensex Index|