Avoid Indian equities, stay long on bonds

Investing.com -- Investors should steer clear of Indian equities as corporate profits are set to shrink, and economic growth is expected to decelerate.

Despite personal income tax cuts, the Indian government remains committed to fiscal consolidation, targeting a reduction in the fiscal deficit from 4.8% to 4.4% of GDP next year. This will lead to real-term spending cuts, further weighing on economic momentum.

Tighter monetary conditions, despite the recent RBI rate cut, have led to significantly higher real borrowing costs. As a result, private sector capital expenditure and hiring are likely to slow alongside weakening corporate earnings.

Given these conditions, BCA research analysts say absolute-return investors to avoid Indian equities, with emerging markets and Asian equity portfolios staying underweight on India. BCA reiterated its recommendation to short Indian stocks while maintaining a long position in Chinese A-shares.

But fixed-income investors should remain long on Indian 10-year government bonds with currency hedges, as emerging market bond portfolios keep an overweight stance on India.

The rupee is expected to weaken further against the U.S. dollar in the near term.