Sell Indian Stocks Ahead of Poll Results, Credit Suisse Says

April 27 (Bloomberg) -- Investors should lower their holdings of Indian stocks on concern the nation’s ongoing elections may prove a “sharp disappointment,” Credit Suisse Group said.

Shares appear to have priced in a victory for a “market- friendly, stable government” without factoring the possibility of other outcomes, the brokerage said. Regional investors should instead buy other so-called high beta markets and local shareholders should reduce their holdings of more volatile stocks such as Bharat Heavy Electricals Ltd., they added.

The Bombay Stock Exchange Sensitive Index has gained 39 percent since sliding to 2009 low on March 9, making India one of the 10 best-performing stock markets among the 84 tracked by Bloomberg in that period. The MSCI Asia-Pacific Index rallied 26 percent since that date while the MSCI Emerging Markets Index climbed 32 percent.

“Election uncertainties are now badly mispriced,” Credit Suisse analysts Nilesh Jasani and Arya Sen wrote in a report today. “Chances of a market-friendly government have not improved in the last few weeks. As a result, the near surety of such an outcome in the stock market has opened the doors for a sharp disappointment.”

Indians began electing on April 16 a new government that will have to revive an economy growing at its slowest pace in six years. Votes will be counted on May 16, with opinion polls showing neither the Congress party-led United Progressive Alliance nor the main opposition, led by the Hindu-nationalist Bharatiya Janata Party, winning a clear majority.

Economy’s Prospects

Gains in Indian stocks over the past two months also suggest that investors are overly “positive” on the prospects for India’s economy, the Credit Suisse analysts said. The Reserve Bank of India said on April 21 the economy may expand 6 percent in the fiscal year that started April 1, the slowest pace since 2003.

Even if the election results disappoint investors, signs of improved funding may boost growth at Indian companies, helping extend gains in share prices, Credit Suisse said. Unitech Ltd., the nation’s No. 2 developer, was among companies that sold shares this year to raise funds.

“If the capital market-based funding continues to be strong and somehow $5 billion to $10 billion worth of funding gets done in the next three months, corporate India could be back on a strong growth path,” the analysts wrote.

Credit Suisse didn’t specify which “high beta” markets investors should buy at the expense of Indian equities.

Bharat Heavy, the nation’s biggest power equipment maker, has gained 21 percent this year, while Hindalco Industries Ltd., India’s largest aluminum producer, has climbed 11 percent. Credit Suisse lowered its rating on Bharat Heavy to “neutral” from “outperform” and downgraded Hindalco to “underperform” from “neutral” this month.