Credit Suisse cuts nominal growth forecast

Citing the impact of the second wave of the pandemic over the economy and consumer sentiment, Swiss brokerage Credit Suisse has lowered its nominal GDP growth forecast by 150-300 bps to 13-14 per cent, but expects a stronger recovery in the second half as it sees the lockdowns having limited impact on tax collections.

Last month, Neelkanth Mishra, the co-head of equity strategy for Credit Suisse Asia Pacific, and India equity strategist, had told PTI that he expected the real GDP to fall to 8.5-9 per cent in FY22 due to the more severe pandemic attack.

The virus case load has crossed the 25-million mark, death toll from the same is nearing 2.9 lakh mark, which is one of the highest in the world as the test positivity rate has been around 15 per cent for long.

"Our macro strategy team expects the overall impact on the pandemic restrictions on GDP to be about 150 bps in base case scenario.

"Even if we assume a 300 bps impact if statewide restrictions prolonged, nominal GDP growth in FY22 can still be around 13-14 per cent," Jitendra Gohil and Premal Kamdar, equity analysts at Credit Suisse Wealth Management India said in a note on Thursday.

Their optimism is based mostly on limited impact on tax collection  and other revenue avenues of government, driven by good recovery in H2, albeit lower than what had anticipated before the second wave, and and pent-up demand.

Recovery will be supported by pent-up demand, albeit lower than in the case of the first wave, and the rub-off impact of global growth as the developed market could see faster growth supported by vaccination drive, they said.

Though the localised lockdowns are going to hurt the easy movement of goods, and supply chain bottlenecks will delay recovery in the manufacturing sector, we see pent-up demand supporting growth from the second half.

But  the fact that the virus is now spreading in the rural areas is a concern.

Another positive factor is the good monsoon forecast and, if this materialises, this will the third consecutive good monsoon season.

This bodes well for the agriculture economy, and will help revive rural demand faster, they said.

“Overall, we expect good recovery in the second half of the financial year, albeit lower than what we had anticipated before the second wave,” they said, adding recovery will be supported by pent-up demand albeit lower than in the first wave, and the rub-off impact of global growth as developed markets may see faster growth following mass vaccination.

They also believe the impact on tax collections could be limited given the improving compliance and the positive impact of higher inflation on overall tax collections.

Given that the MSCI premium of domestic equities is down to only 5 per cent now, from the historical average of 8 per cent, they are positive on the market and therefore do not see much sharper cuts in earnings forecast as well.

The domestic equities showed resilience despite the second wave and outperformed the MSCI ex-Asia Japan since April by 7.6 per cent in dollar terms, which is visible from foreign investors reluctance to dump domestic equities.

FPIs have sold only USD 2.3 billion since April but this outflow is modest against $35.1 billion of net inflows in FY21, says the report, and pointed out that their recent selling was partially absorbed by a pick-up in buying by domestic mutual funds and resilient retail flows which doubled to $736 million in April from $339 million in March.

Given all these, we remain positive on equities with a cyclical bias and continue to prefer mid-caps over large-caps, they said.

The domestic equity indices were the best performers among major indices in FY21 with the Sensex gaining close to 60 per cent, while for the past 30 days it gained 1.5 per cent and for the past 90 days lost 4.1 per cent.

Similarly, the Nifty gained over 64 per cent in the past 12 months and gained 2.1 per cent in the past 30 days and lost 1.9 per cent in the past 90 days.

As against this, MSCI AC world gained rallied 45.5 per cent in the past 12 months and lost 2.8 per cent in 30 days and lost 9.2 per cent in the last 90 days.

The same for S&P 500 stood at 45.4 per cent, -0.5 per cent, and  -5.9 per cent; for Euro Stoxx 50 it was 44.6 per cent, -0.6 per cent and 8.3 per cent; MSCI EM at 45.5 per cent, -2.8 per cent and -9.2 per cent; MSCI Asia ex-Japan at 42.3 per cent, -3.8 per cent and -11.3 per cent; MSCI China 30 per cent, -4 per cent and -18.8 per cent; and Nikkei 225 gained 38.9 per cent and lost -6.3 per cent for the past 30 days and -8.1 per cent in the past 90 days, concludes the report.

Photograph: Arnd Wiegmann/Reuters