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MOSL: India Strategy-Performance and valuation divergence entrenches further-Weak earnings recovery leading to market polarization

India Strategy: Performance and valuation divergence entrenches further; Weak earnings recovery leading to market polarization

 

Market nerves tested by elevated volatility, domestic slowdown

The Nifty had put up an impressive show in March and the early part of Apr’19, led by strong FII flows amidst the general elections. Shortly afterward, the election verdict too turned out to be better than market expectations and a BJP majority government took office with the Nifty crossing the 12,000 mark in June’19. However, the euphoria was short lived with the Nifty consolidating in the 11,500-12,000 range thereafter. Volatility levels have picked up, especially in mid and small-cap indices, as market sentiment remains exposed to slowdown in the economy, concerns around liquidity woes for NBFCs and a moderation in consumption on the domestic front. Meanwhile, the RBI has changed its stance from neutral to accommodative with another 25bp rate cut. Interest rates have softened globally as well, with almost USD12t of debt trading at negative yields and the global central banks sending out further dovish signals.

 

Polarized markets; valuation divergence continues

As the markets consolidate, the picture has turned more polarized with a few stocks accounting for the gains in the Nifty. We had highlighted in our note about the prevalent divergence in both the large- and mid-cap indices. In that note, we had illustrated how the top 15 stocks of Nifty were showcasing the benchmark at all-time highs and how the other 35 were showcasing it at sub-9k levels. That divergence between these two segments of the market has become quite stark in terms of both performance and valuations – one trading at a substantial premium and the other at a huge discount to their long-period average valuations. At this juncture, we thus believe that it will be useful to sift through the Nifty constituents and highlight a few names where valuations have turned attractive.