As the year began, Bernstein anticipated a shift in leadership from Indian to Chinese equities, a prediction that has materialized with the index rising approximately 26% since its January low, compared to a 12% increase in the MSCI India index. The near-term outlook for India remains challenging relative to other Asian markets due to a lack of broad-based earnings support and slowing institutional flows. However, Bernstein identifies pockets of opportunity within India, particularly in momentum stocks and high-quality exposures.
Bernstein advises investors to take profits in high-volatility, low-quality, and small-to-mid-cap names, especially those that are overvalued and crowded. The firm believes that the high-volatility trade is approaching an inflection point. Although there has been a broad-based moderation in earnings revisions for Indian equities, certain sectors are performing well. While Materials, Energy, and Technology are in a downgrade cycle, Healthcare and Utilities have reached record-high earnings expectations, though this leaves little room for further support.
In recent weeks, upward earnings revisions have been noted in sectors such as Discretionary, Real Estate, and Industrials. Meanwhile, earnings for Staples, Financials, and Communications are recovering, suggesting these sectors could continue to perform well in the short term. Despite this, Bernstein notes an unprecedented bearish sentiment towards Indian tech, which appears unsustainable given the lack of a clear bottom.
Foreign investor outflows from Indian equities have totaled $3 billion, while domestic institutional flows have been strong at $23 billion, already surpassing last year’s total. However, domestic flows have been slowing recently, and foreign flows have yet to bottom out, placing greater reliance on retail investors who have remained positive but volatile.
Valuations are stretched amid moderating earnings and declining investor support, raising concerns. The rally has been driven by momentum stocks, which are up 21%, and high-volatility stocks, up 18%, supported by both valuation and earnings upcycles. Bernstein continues to favor momentum trades, expecting upgrades to persist given the low correlation among high-momentum stocks and the absence of extreme factor dispersion. However, the firm warns against chasing high-volatility stocks, as their valuations have peaked, earnings revisions are at their zenith, and crowding risk is near an all-time high.
Bernstein recommends increasing portfolio exposure to high-quality, larger-cap stocks. The dispersion based on volatility is the most stretched and is likely to reverse first. Investors are advised to focus on momentum stocks while being cautious with high-volatility names and enhancing the quality and size factor of their portfolios.
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