Demonetisation move may be helping bond prices to surge, but this could well be a prelude for another rally but in equities, now bleeding with overseas investors dumping emerging market stocks amid spiking US Treasury bond yields. Reason: Domestic bonds is supported by higher cash in the banking system.
“Domestic and global liquidity should support lower bond yields and hence a lower cost of equity for India,” HSBC Global Research said in a report. “Our rates strategist believes that the withdrawal of high denomination notes will be liquidity positive, supporting lower bond yields.”
“We also believe that Indian valuations are reasonable,” it said.
Lower yields mean that people will also expect lower returns from equities than the usual. This in turn, will help price to earnings (PE) multiples to expand, a positive trigger for equities to rise, said two market analysts. With elevated rates investors are now not ready to invest in stocks with higher P/E ratio.
The price-earnings ratio (P/E Ratio) is a gauge for valuing a company that measures its current share price relative to its per-share earnings.
Indian equities face two events mired in uncertainty: 1) Trump winning the US elections; and 2) the government’s surprise move to curb black money.
HSBC remain overweight on Indian equities in a regional context.
“If there is any volatility, we believe India will get caught in it but relatively less so than other Asian markets due to lower sensitivity to factors such as bond yields, currency and Chinese growth,” it said.
The government has withdrawn old series of Rs 500 and Rs 1000 notes, a move that has helped banks to garner about Rs 3 lakh crore through demonetised notes, deposited in the banking system in just four days, according to the finance ministry.
Indian equities may be impacted through various channels including fluctuations in risk premia, impact on trade and growth, especially for China, the largest economy in the region, currency fluctuations, and changes in oil prices.