At 71.9, the Indian rupee (INR) is now one of Asia’s worst performing currencies, having fallen over 12% year-to-date against the dollar (USD).
Rising crude oil prices and emerging market crises have contributed to the rupee’s plunge, making equity investors think twice about their India exposure.
In fact, foreign portfolio and institutional investors have pulled INR 5633 crores ($782 million) from equity markets and INR 49,198 crores ($6 billion) from debt markets in net flows year-to-date (YTD), according to National Securities Depository data.
While a weakening currency has dissuaded some investors by wiping out their local currency returns, some other market participants are sticking it out, turning to sectoral plays to win returns.
In fact, Pictet Wealth Management has recently upgraded its Indian equity weighting to neutral, precisely because the rupee is relatively cheap.
‘The INR was far above its long-term average real effective exchange rate and the stock market was at 19x forward price-to-earnings ratio to 2019, making it one of the most expensive emerging markets,’ Pictet chief investment officer David Gaud told Citywire Asia.
‘Eight months later, the INR is down almost 12% vs USD YTD and the equity market valuation has dropped below 18x, while earnings growth was revised up and Indian corporates’ return on equity remain superior to the rest of the region.
‘These factors explain our upgrade to neutral,’ he added.
In terms of sectors, Gaud prefers high-quality private banks and insurance amid market share gains and good growth momentum.
‘Elsewhere, in the context of a global trade war, we like India for its strong domestic economy, and so are positive on leading consumer brand names, on energy companies servicing the domestic market, and utilities,’ he said.
Sanctum Wealth Management’s chief investment officer, Sunil Sharma, believes that mid-and small-cap stock investors have to be even more selective until the currency stabilises.
Sharma favours the information technology and pharmaceutical sectors, in addition to fast-moving consumer goods, which benefits from inelasticity of demand.
Surprisingly, energy has been another outperforming equity sector so far, driven by Reliance Industries, Sharma wrote in a report.
On the other hand, metals, public sector banks and real estate have been consistent underperformers.
Deutsche Bank Wealth Management, meanwhile, dislikes the telecommunications sector, expecting the earnings of Indian telecom companies to continue to decline in coming quarters.
The German lender’s preferred sectors are consumer discretionary, financials and healthcare.
Deutsche Bank is neutral on Indian equities ahead of the upcoming general elections in 2019, and forecasts the INR to weaken to 74 against the greenback by end-June 2019.
This contrasts with Credit Suisse, which has neutralised its negative view on the rupee, predicting that most of the negatives have already been priced in. Its three-month forecast for the USDINR now stands at 69, while the 12-month forecast is 68.5.