Midcap stocks look expensive, says Jefferies as it points out biggest risk for Indian stocks

Jefferies' Christopher Wood in his latest GREED & fear note admitted that the Indian market looks expensive, most particularly from a midcap standpoint. He said Nifty MidCap 100 Index is now trading at 25.9 times one-year forward earnings, compared with 20.2 times for the Nifty. He, however, insisted that the valuations should be seen in the context of the acceleration in growth which should be anticipated as a consequence of the developing capex cycle, combined with the continuing commitment to government funded capex discussed here recently following this month’s budget which was remarkable for its lack of populist measures.

Wood maintained his view that India stays the best equity story in the world on a ten-year view. "As for nearer term issues, the biggest risk in the Indian market is simply how well it has done of late, as reflected in the performance of GREED & fear’s India long-only portfolio which is up by 75.5 per cent in US dollar terms on a total-return basis since late March 2023, compared with a 39.2 per cent gain in MSCI India as the stock market began to discount the presumed end of monetary tightening," Wood said.

Wood believes that the domestic stock market was being driven by surging mutual fund inflows. Wood said Prime Minister Narendra Modi’s goal would be to win a record number of seat for his BJP party in the forthcoming elections.

"In the last general election in 2019 the BJP won 303 seats in the Lok Sabha, up from 282 in 2014. Modi has set a target of 370 seats for the BJP and 400+ for the BJP-led alliance (NDA) in the upcoming national elections. Such an electoral outcome is no longer far-fetched. As for the Congress Party, the dominant political party in India since independence in 1947, it faces an existential crisis," he said.

From a longer term standpoint, Wood said India’s contribution to world real GDP growth should reach 7.7 per cent by 2028, based on IMF projections which assume only an average 6.3 per cent real GDP growth in India for the next five years.  India’s ranking globally in nominal GDP terms is projected to rise from the 13th largest in 2005 to the 3rd largest in 2027, he noted.

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