Credit Suisse downgrades Indian equities to Underweight

About 3-4 months back, there were a slew of downgrades of Indian equities by global investment houses like Goldman Sachs, Morgan Stanley etc. At that time Credit Suisse had not downgraded. In the aftermath of the oil price rally, Credit Suisse has gone ahead and downgraded Indian equities from Overweight to Underweight. That means, Credit Suisse is asking its clients to take exposure less than the model portfolio recommendation.

The big trigger has clearly come from crude prices which are nearing their all-time high levels last seen way back in 2008. In fact, if you just look at Brent Crude between the first week of December 2021 and the first week of February, it has traversed a full 85%. Most of the pressure has come from the Russia Ukraine war since the fear is that if sanctions are imposed on Russia then nearly 7% of the global supply of oil could go out of the market.

However, the good news is that Credit Suisse sees more of a valuation mismatch than a structural problem with the market. It continues to believe that India has strong structural prospects and robust EPS momentum. Therefore, Credit Suisse has underlined that it will continue to look for opportunities to re-enter the market. At a macro level, higher oil prices deepen current account deficit and also add to inflationary pressures.

Credit Suisse is not only cautious on India but also on South Korea and Thailand. Like India, Korea also depends heavily on oil imports. Thailand, relies heavily on European and Russian tourism and that is likely to be negatively impacted. Meanwhile, Credit Suisse has upgraded Malaysia on positive commodity exposure. It has also upgraded China and recommends that the surplus generated by selling Indian equities be deployed to buy Chinese equities.

There are some inherent assumptions in this downgrade. Firstly, the assumption is that high oil prices will last longer than expected. The second assumption is that the Fed hikes may be slower than expected but the eventual Fed targets would still be respected. The third assumption is that Brent above $120/bbl would add $60 billion to India’s import bill and combined with other minerals, inflation could spike by a full 100 basis points or 1%.

However, the worries in the Indian context are not just on the oil front but also on the larger fiscal story. In this regard, another report by Kotak Institutional Equities has also pointed to the fiscal risk and highlighted that if oil stays above $120/bbl it could add fiscal deficit to the tune of 1.9% of GDP. The report also pointed out that the government would have to make hard choices because either the budget goes for a toss or inflation goes out of control.