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MOSL: BULLS & BEARS (July 2018): India Valuations Handbook — Another month of consolidation for the Nifty

BULLS & BEARS (July 2018): India Valuations Handbook — Another month of consolidation for the Nifty

 

Strategy: Another month of consolidation for the Nifty

• Nifty ends flat in a volatile month: After rallying strongly by 6.2% in April 2018, the Nifty ended flat for the second consecutive month in June 2018. Heightened fears of a bitter global trade war, coupled with rising crude prices and a depreciating currency, kept the markets on tenterhooks, with mid-caps bearing a disproportionate brunt. DII inflows stood at USD2.1b in the month (USD 2.2b in May), while FIIs continued their selling spree (offloaded USD0.4b v/s USD1.4b in May). In FY18, DIIs bought USD17.7b, almost ~4x of FY17, while FII flows were USD3.2b, less than 50% of FY17 flows. Mid-caps (down 3.8% in June after a 6.8% correction in May) underperformed the Nifty in June and also lagged the benchmark on a trailing 12-month basis (3% return v/s Nifty’s 13%). Despite this sharp underperformance, the valuation premium of midcaps v/s large caps is still at 22%.
• Expect volatility to remain high; Mid-caps still pricey: As one moves closer to the election cycles, we expect volatility to stay elevated. Reversal of the benign monetary policy stance and higher crude oil prices have kept the pressure on macros amid continued selling by FIIs. Progress of monsoon, political developments (potential opposition unity for the CY19 general elections) and global cues on trade wars will keep the markets on the edge, in our view. Despite the sharp correction in mid-caps, their valuations still remain stretched, and thus, vulnerable in a volatile market. Nonetheless, with the arrival of monsoon (predicted to be the third consecutive year of normal monsoon) and the improvement in underlying demand in the economy (Auto numbers, PMI Index, Cement volumes), the picture on micros is looking brighter, despite the deterioration in macros. Announcement of MSP prices for the Kharif season will be closely watched as it has a significant bearing on rural sentiment.