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MOSL: BULLS & BEARS (May 2018)-India Valuations Handbook — Markets climbing wall of worry-Valuations stay rich

BULLS & BEARS (May 2018): India Valuations Handbook — Markets climbing wall of worry; Valuations stay rich

 

Strategy: Markets climbing wall of worry; Valuations stay rich

• Nifty bounces back with a vengeance in April: After sliding 4.9% in February and 3.6% in March, Nifty bounced back strongly and returned 6.2% in April – its highest monthly gain in 24 months. After a bout of volatility in previous two months (rising bond yields, potential trade war concerns), global markets have settled down. In India, continued robust domestic flows, improvement in high-frequency data and healthy start to 4QFY18 earnings season has calmed nerves amidst FII selling, currency depreciation (down 2.2% in April and 4.2% CYTD’18) and rising crude prices. In April, while DII inflows were USD1.3b, FII outflows were USD0.9b. In FY18, DIIs bought USD17.7b, almost ~4x of FY17, while FII flows were USD3.2b, less than 50% of FY17 flows. Midcaps (up 8.2% in April) outperformed the Nifty in April, but lag Nifty on a trailing 12 month basis (12% return v/s Nifty’s 15%). Note that midcaps still command a rich premium of 23% v/s large caps.
• Continued macro uptick; expect volatility to stay high: Notwithstanding the macro concerns on crude, and consequently, on inflation/currency/CAD, we note that macro data on growth is pointing towards an uptick. High-frequency data (IIP, core sector growth, monthly vehicle sales, fuel consumption, and GDP print) point toward bottoming out of macros. Our proprietary Economic Activity Index (EAI) is also pointing at a strong recovery. After averaging 7% YoY in January-February 2018, it posted a 53-month high growth of 13.8% YoY in March 2018, implying ~10% YoY growth in 4QFY18, better than in the past few quarters, supported equally by Consumption and Investments. We expect real GDP growth to increase from 7.2% in 3QFY18 to 7.6% in 4QFY18, better than 7.3% projected earlier.