Barlow’s Research Roundup: Tide turning for India’s equity markets

Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

Bottoming India market

Scotiabank BofA Securities analyst Amish Shah sees the tide turning for Indian equities,

“We expect markets to stay volatile driven by multiple risks a) higher crude/commodities, b) weaker monsoons, c) likely Fed/RBI rate hikes, d) INR depreciation & e) AI disruption. We stay cautious: expect Nifty FY27 earnings growth at 10 per cent vs street at 13 per cent, atop 130 basis points of cuts seen year-to-date. FII outflows are unlikely to reverse given strong USDT yields currently, although the pace of outflows could moderate. In a bear case scenario, if all these risks were to pan out, Nifty could see 8-per-cent potential downside. We have been cautious on markets since Aug 2024 (see note: Shifting Sands) but see risk reward turning balanced with bias in favor of upside. We would hence view any potential correction incrementally as an attractive opportunity … We prefer sectors that offer high earnings growth/visibility as investors chase growth or value. SMID caps could offer 817 bps of earnings growth (FY26-28E) premium vs Nifty, providing opportunities for bottom-up stocks across market caps, despite SMID’s valuation premium over Nifty at 39 per cent. We prefer Financials, Autos, Quick Commerce, Regulated Power Utilities, Select Discretionary (Jewelry, Specialty Retail), Upstream Energy, Non-ferrous metals, Cement”

Duvernay production climbs

RBC Capital Markets analyst Michael Harvey highlighted a resurgent Duvernay region and the resulting beneficiaries,

“Our view: The Duvernay’s broader resurgence remains a compelling structural narrative across the WCSB, underpinned by continued operator momentum as drilling and completion technologies mature and well economics improve. Total aggregated Duvernay volumes now stand at approximately 360,000 boe/d, representing a 5-year CAGR increase of 13 per cent (all regions aggregated). The West Shale Basin (’WSB’) has emerged as the highest-growth sub-region, with Paramount Resources, Spartan Delta, and Baytex Energy collectively driving meaningful growth of 120 per cent year-over-year. We also note that PrairieSky Royalty, which is included on RBC’s Global Energy Best Ideas List, holds a meaningful share of fee lands throughout the WSB, enabling PSK to benefit from accelerated growth without capital expenditures”

Credit

IMCO analyst Lotfi Karoui outlined an unfortunate return of financial shenanigans in The return of financial engineering - not 2008, but not nothing,

“Securities margin balances – a direct measure of leverage employed by equity investors – have picked up meaningfully in recent years. As a share of total equity market capitalization, these balances remain below prior cyclical peaks, but the pace of increase over the past two years is notable. Margin leverage usually amplifies market moves, and perhaps more importantly, margin calls tend to be triggered by market stress rather than by deteriorating fundamentals, forcing sales into falling markets and increasing the risk of more widespread deleveraging. Aggregate hedge fund borrowing points in the same direction: Federal Reserve supplementary flow of funds data show that hedge fund prime brokerage borrowing has roughly doubled since late 2022 … Total AUM (assets under management) in U.S. leveraged ETFs has more than quadrupled since 2022 … Borrowing is increasingly being layered on top of already leveraged assets. Net asset value (NAV) lending and subscription facilities – which allow sponsors to borrow against fund assets or investor commitments – are themselves being securitized, adding fresh layers of leverage within the system”

Bluesky post of the day

Diversion

“Forty interesting facts about Australia” - Marginal Revolution