Moneycontrol BureauMahesh Nandurkar of CLSA said global liquidity would continue to play a major role in market valuations and a rate hike by the Federal Reserve later this month was a risk.Foreign institutional investors have pumped in more than Rs 57,000 crore so far in Indian equities since March (especially after Union Budget).
At 8,952 (September 8 closing), the Nifty is now almost close to February-March 2015 peak levels of about 8,900-9,000. Interestingly, the 12-month forward consensus Nifty EPS (earnings per share) then at 537 was about 2 percent above the current. So currently the Nifty PE (price-to-earnings) is 2 percent higher than the February-15 peak, he said.
As the equity markets approach new highs, he said he felt nearly the entire PE rerating of the Nifty over the last six months can be explained by the fall in the Indian risk-free rate.
Since February-end, India's 10-year government bond yields have come off by about 60 basis points; this alone can explain a 15-18 percent rerating, everything else remaining the same, according to him.
On the flipside, Nandurkar said lower yields implied lower inflation and growth expectations in the long run. In the short run, however, a fall in the bond yields would have the capability to drive a further rerating of Indian equities.
He said he felt a likely change in the 10-year benchmark security by the month-end may drive down the risk-free rate by a further 20-25bps, though only optically.
In model portfolio, the brokerage house remained heavily overweight on financials, largely in private banks including HDFC, HDFC Bank, IndusInd Bank, ICICI Bank and Bank of Baroda among PSUs.
Other large overweights are Power Grid, Reliance Industries, oil marketing companies, HCL Technologies, ITC and Ambuja Cements, Nandurkar said. (Disclosure: Reliance Industries owns Network 18 that publishes Moneycontrol.com)
The brokerage house has added InterGlobe Aviation as a discretionary consumption play as its efficient, low cost and low capital intensity aviation model with return on equity of over 50 percent makes the stock attractive at a 20x CY18 PE.
He said Indigo's addition is at the cost of TCS. With this, the brokerage house has increased underweight on IT even further.
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