May 25, 2016
EM/APxJ Country Framework: Upgrade India to OW; Downgrade Australia to UW
Upgrades: India and Chile to OW from EW; Peru to EW from UW Downgrades: Australia to UW from EW; Philippines & Egypt to EW from OW Current OWs: Taiwan / India / Korea / Hong Kong / Chile / Qatar Current UWs: Australia / South Africa / Singapore / Thailand / Colombia / Czech Republic
Key rationales that drive our upgrade India to OW are:
1. Less rich valuations and less crowded positioning: India's relative valuation to EM and relative positioning among GEM fund managers have both come off from record high levels at the start of the year (see Exhibit 2 Exhibit 2).
2. Rising dividends per share leading to more attractive dividend yield, owing to improving corporate balance sheet. MSCI India F12M dividends per share is on a consistent rising path post GFC, and its dividend yield relative to EM is now reaching an historical high level.
3. Supportive macro environment: a) Little deflation threat, favourable demographics, low overall debt, and possibility of productivity-enhancing reforms. b) Further rate cut by another 50bps in F2017, according to our economist Chetan Ayha. c) GST bill likely to be approved this year, according to our India Equity Strategist Ridham Desai. d) Monsoon rainfall is expected to be above normal.
4. India is becoming a low-beta market within EM, where we currently see downside to the overall EM index.
Key rationales that drive our downgrade Australia to UW are:
1. We downgrade after strong outperformance versus MSCI APxJ with overbought technical signal: Australia has delivered the highest US$ return among APxJ countries since our last country model update in April.
2. Increasingly challenging domestic macro: The shorter-term headwinds posed by a peak in the housing market and ongoing resources capex unwind leave economic growth dependent on a weaker AUD (MS forecasts AUD/USD 0.65 by 4Q17).
3. Bearish view from our country strategist: The PT downside for ASX 200 in US$ term is ranked #14 among the 16 country indices in EM/APxJ where we have country strategy coverage.
4. Our bottom-up analysts also share concerns on Australian large-cap stocks: Only one out of the largest 10 stocks has price target upside; we have a negative stance on the major banks, which takes up circa 30% of the index weight
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