“The recent correction in the market has made valuations more palatable at 17.2x 1-year forward earnings. 56 of the Nifty100 stocks now trade below the 10-year historical average while less than a quarter of the companies are more than 15% above long-term valuation averages,” Jefferies said in a note.
“On our preferred yield-gap parameter (10-yr bond yields less 1/Nifty PE), the gap at 150 bps is still 20 bps above average, though rates now have a downward momentum,” the note further said.
Meanwhile, Morgan Stanley has upgraded India to Equal-weight (EW) relying upon its narrowing valuation premiums and resilient economy.
According to Jefferies, Nifty is down 10% from the December 2022 peak and is flat over the past 19 months which has led to improvement in overall market valuations. “The valuation (1-year forward consensus PE) has declined 25% from the October 21 peak, almost matching the 33% PE contraction during the 2011 tightening cycle when repo rates went up by 375 bps versus 250 bps in this cycle,” it said.
Several financials, select autos, and pharma trade at a discount to average, the Jefferies note said. Morgan Stanley, at the same time, is overweight on financial and consumer discretionary sectors and has also upgraded the healthcare sector to Equal-weight.
Jefferies said that it remains constructive on the domestic cyclicals and has added Ultratech Cement to the model portfolio with 2 ppt weight. It has also added Sun Pharma, calling it as top healthcare pick.
Relative valuations are also better now, Jefferies said, adding that compared to the EM & AxJ benchmark, the Nifty PE premium is at average levels.
Meanwhile, Morgan Stanley places India at the 7th spot in terms of market allocation among APxJ/EM (Asia Pacific ex-Japan / Emerging Markets). The US-headquartered investment bank and financial services company is ‘Overweight’ (OW) on China, South Korea and Taiwan.
“The services export rise (+30% 3-mma) and the consequent jump in net services trade surplus (US $15bn, +76% YoY) are encouraging for CAD reduction, though we cannot explain the sudden services export spike from the bottom up. Meanwhile, the recent decline in oil prices to below US$80/bbl is positive and supports the import cover of 9+ months,” the report said.
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