Daily Management Review

Goldman Says Indian Bonds Beaten By India’s Stocks Even Though They Are Expensive


11/29/2017




Goldman Says Indian Bonds Beaten By India’s Stocks Even Though They Are Expensive
While there are predictions that the earnings growth of the Indian stocks to be approaching 20 percent, experts are of the opinion that compared to India’s bonds, it is much better to invest in India’s stocks even though they are the most expensive in Asia.
 
“The total return on equities will exceed that of bonds if bond yields rise moderately as we expect, given modest RBI tightening,” Timothy Moe, Goldman Sachs Group Inc.’s chief Asia Pacific regional equity strategist, said by email Nov. 28. “We got overweight on stocks over Indian bonds.”
 
This year, $24 billion of Indian stocks have been bought by both domestic funds and foreign investors and which is a record figure. This trend has bene driven by the economic, taxation and legal reforms that have been brought in by Prime Minister Narendra Modi’s government. The nationwide implementation of the goods and services tax is one of the more important ones. Those measures have prompted Moody’s Investors Service to enhance India’s sovereign rating to the highest since 1988 this month, propelled India to become Asia’s most costly market in terms of price-to-earnings ratio and that S&P BSE Sensex has been propelled to one of the best performing ones in Asia.
 
“The next leg of the bull run will be driven by earnings growth, not by interest rates or valuations,” Moe said. Driven by enhanced growth in the country’s GDP, and falling effect of the goods and services tax and demonetization, the profits of the Indian companies is expected to grow by an average of 18 percent which would by the quickest since 2010, the bank expects.
 
In recent months, there has been some legitimate concerns about faster inflation due to the rising global oil prices which has, consequently dampened most hopes of a rate cut and this has soured some of the sentiments for the Indian government bonds. According to most analysts, the Reserve Bank of India had earlier cut the bank rates to a seven year low and it is expected that it would hold the repurchase rate same throughout of 2018.
 
The RBI believes that celebrating on reduced inflation should not be done as of yet, according to sources.
 
In October, the annual inflation pace was pushed up to its highest point in the past seven months due to the higher oil prices as there had been a 62 basis point growth in the 10-year bond yield of India compared to the lowest point in July. And consequently, it would not be soon that the RVBI would be able to reduce the interest rates, according to experts. While raising its inflation forecast for the October-March period, the RBI kept benchmark rates unchanged at its meeting last month.
 
“2018 will be a solid year for Indian stocks, but it won’t be as exceptional as 2017 as valuations remain very elevated,” Moe said.
 
(Source:www.bloomberg.com) 






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