Want to put some money to work in India? Here are JPMorgan, HSBC and BNP Paribas' favorite sectors

Published Tue, Feb 15 20228:39 PM EST

India has a tricky road ahead as policymakers balance economic expansion with rising inflation. But that doesn't mean major investment banks don't see opportunities. It could mean uncertainties in the short term, followed by longer-term growth and higher returns on investment, strategists told CNBC. JPMorgan is optimistic about India for the next five to 10 years and expects long-term investors to find enough attractive opportunities in the country, according to the head of India equity research at the investment bank, Sanjay Mookim. "We think that it is one of the few large countries in the world where there is an assurance of growth, there is an assurance of economic upside per capita income improvement, and all the good things that come associated with that phenomenon," he told CNBC by phone. Still, Mookim pointed out that in the next six-to-12 months, investors will have to worry about India's growth potential as well as likely earnings surprises, upgrades and valuation. India stocks Indian stock markets have been fairly resilient during the Covid pandemic, with the Nifty 50 breaking the 18,000 level in October. Bolstering market confidence in the coming months would be the listing of Life Insurance Corporation after the state-owned insurer filed a record $8 billion IPO . French investment bank BNP Paribas is "overweight" on India, which indicates the bank expects the market to perform better in the future. "Despite India's premium valuation relative to other Asian markets, we believe the Indian market would be supported by a stronger growth outlook, relatively higher return on equity and the wide breadth of sectors and investment themes that investors can choose from," Manishi Raychaudhuri, head of Asia-Pacific equity research at BNP Paribas, told CNBC. Economic growth, however, is still regaining momentum after being derailed due to prolonged lockdowns in 2020 and a devastating second wave of Covid infections in 2021. The Reserve Bank of India estimates that the country's gross domestic product will grow by 7.8% in the fiscal year that starts on April 1 and ends on March 31, 2023, with inflation averaging at around 4.5%. Sectors investment banks like Interest rates in India are relatively low as the Reserve Bank of India maintains an accommodative policy stance to revive and sustain growth. At the same time, prices of goods are climbing . In such a scenario, the real rate of return on investments — the annual percentage of profit earned on an investment that's been adjusted for inflation — can turn negative. Strategists told CNBC that in those instances, money typically moves out of debt and into real assets like properties and gold. JPMorgan: Financials Still, stocks look promising now compared to fixed income, according to JPMorgan's Mookim. He explained that if the RBI eventually raises interest rates, debt investments could become attractive again. "Within the equities space, we like financials," he said, adding that JPMorgan expects companies in that sector to deliver topline growth as easing of Covid-related restrictions will reduce further constraints to lending. Meanwhile, asset quality outlook for banks look comfortable while valuations for financial names, while not cheap, are still "very acceptable relative to the market," Mookim said. HSBC: Retail, autos and certain banks British investment bank HSBC likes domestic-oriented sectors in the stock market such as retail, autos, and selected banks, particularly firms that have "strong distribution channels and distribution capabilities," Herald van der Linde, head of Asia-Pacific equity strategy at HSBC, told CNBC. "They have pricing power and there are signs the domestic economy is improving," he added. BNP Paribas: Banks, IT services and energy BNP Paribas' Raychaudhuri said he is positive on a likely domestic consumption recovery as the post-pandemic reopening takes shape and as companies invest more money to grow their businesses. "The principal beneficiaries of these themes in India are financials — private and select public sector banks (those with better asset quality), IT services, oil explorers and select auto and consumer staples stocks," he added. Consumer staples are essential products like food and beverages, household items and hygiene products — these are goods that consumers often cannot or will not remove from their budgets even in times of financial difficulties. Risks ahead As India's growth momentum gradually recovers, the economy faces a number of internal and external risks, according to the strategists. Externally, higher oil prices remain a risk for a net importer of crude like India. Energy prices are currently above the $90 a barrel mark. "India, as an economy and market, does suffer and has suffered historically whenever oil prices have gone up," JPMorgan's Mookim said. Other external risks include the pace of monetary policy tightening by global central banks due to inflation, geopolitical tensions in Ukraine and elsewhere, and potential new Covid variants that could again hit global consumption. "For India these eventualities could translate into more [foreign institutional investor] outflows and depreciation of the Rupee," BNP Paribas' Raychaudhuri told CNBC. "If geopolitical tensions lead to a larger spike in oil prices, the consequent widening of the trade deficit could lead to further weakening of the Rupee, depressing FII sentiment further." Reports last month said that some $13.5 billion in funds from foreign institutional investors have left India since October, due to higher bond yields elsewhere. At the same time, expectations of the U.S. Federal Reserve's move toward tighter policy also shaved off some risk sentiment from global markets. "The recent rise in government bond yields could make equity investments relatively unattractive relative to fixed income, potentially dampening domestic investors' enthusiasm," Raychaudhuri said. China is another factor. HSBC's van der Linde said that a recovery in China could see further outflows from India as investors fund purchases in the world's second-largest economy. On the domestic front, Mookim explained that despite the Indian economy opening up from Covid-related shutdowns, high inflation and poor household consumer confidence have created some near-term uncertainties. "There is a narrative very commonly used nowadays, which is, yes, that there is pent-up demand in India because households have saved money during Covid," he said. "This is basically transposing the U.S. narrative to India because in the U.S., the same argument is being made by a lot of people."

Commuters arrive at a suburban railway station after train service resumed following its closure due to the Covid-19 coronavirus pandemic in Kolkata on Nov. 11, 2020.

Dibyangshu Sarkar | AFP | Getty Images

India has a tricky road ahead as policymakers balance economic expansion with rising inflation. But that doesn't mean major investment banks don't see opportunities.