By Gaurav Kulshreshtha | 03 October 2018
September was a tough month for Indian equities. Valuations were already stretched at the start of the month - 18x one year forward earnings which was 1 standard deviation above mean, MSCI India’s valuation premium to MSCI EM at ~75% [near 10yr high]. This coupled with the credit market concerns emanating from a default at IL&FS, subsequent decline in bond prices of housing finance companies (HFCs) and the general liquidity tightness, precipitated into a sharp sell-off of Indian equities.
While NIFTY was up 11% YTD till 31st August and was one of the best performing markets globally, but with the sharp correction in September, it gave up almost 6.5% of these gains and is now up only ~4.5% YTD 1st October, 2018.
Citi analysts believe that Indian equities may continue to be volatile in the near term given that the valuations are still high despite a sharp correction in September. There are also risks of some moderation in growth in few segments as borrowing costs may rise if the current tight conditions persist for some more time. They also highlight that domestic flows into equity mutual funds, that had powered equity market performance all along, have now started to moderate. This would also be keenly watched.
Given this backdrop of worsening global/macro outlook (trade wars, crude, EM outflows, burgeoning CAD), stretched valuations and the uncertainty in political outlook ahead of elections later this year and next, are enough reasons to stay cautious in equities. Citi analysts maintain their March’ 19 Sensex target of 37,300 for now. Clients may stick to their strategic asset allocations, stay diversified in their financial portfolios and brace for volatility.