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MOSL: BULLS & BEARS (May 2017)-India Valuations Handbook — Markets consolidate gains-Cyclicals outshine Defensives

​BULLS & BEARS (May 2017): India Valuations Handbook — Markets consolidate gains; Cyclicals outshine Defensives

Strategy: Markets consolidate gains; Cyclicals outshine Defensives

• Good start to FY18; mid-caps continue outperforming Nifty: After delivering 19% returns in FY17, the Nifty made a good start to FY18 with 1.4% gains in April-2017. Notably, the index delivered positive returns for the fourth consecutive month, led by benign global cues, strong domestic liquidity and a good start to the 4QFY17 result season. Indian currency has also rallied 5.4% in the first four months of CY17, bolstering dollar index returns. However, at 22.5x trailing 12 months and 19x FY18E P/E, valuations do not offer much comfort unless accompanied by an earnings surprise, in our view. The mid-cap index, after delivering 35% returns in FY17, rose 5.2% in April.
• Momentum sustains; liquidity benign: Both the Nifty and Mid-cap index maintained positive momentum of the previous year in April. The market also saw ninth consecutive month of domestic mutual fund inflows (USD 1.5b in April). FII outflows came in at USD 0.3b after two months of inflows. Over last 12 months, MSCI EM and MSCI India have delivered 15-16% returns each. However, over last five years, MSCI India outperformed MSCI EM by 96%. In April, India-Sensex (+12%), Korea (+9%), Brazil (+9%) and Indonesia (+7%) were the best performers among the key global markets in local currency terms. Russia was the only market delivering negative returns (-10%).