Macquarie bets on banks, autos as Nifty PE persists above 10-yr average following recent rally

Macquarie in a recent note has provided insights on its India strategy, highlighting which sectors appear more promising in the current market landscape.

Driven by abundant liquidity, Indian stock markets have surged in recent months, pushing valuations higher. Macquarie, in its latest India strategy report, used forward Price-to-Earnings (P/E) ratios and a composite score of growth, Return on Equity (ROE), and momentum, rather than the traditional Price-to-Earnings Growth (PEG) ratio, to pinpoint promising sectors in the current market.

Based on this analysis, Macquarie finds the Financials (particularly banks and diversified financials), Telecom, Autos, and Materials sectors to be attractive. Conversely, it views Staples, Utilities, Healthcare, and Industrials as less appealing.

When overlaying sector performance relative to the broader market over the past year, the brokerage remains favourable towards Financials and Materials, while recommending a reduction in exposure to Utilities and Industrials.

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The Nifty 50 index is currently trading at a one-year forward price-to-earnings (PE) ratio of 21.05x. While it is close to the 5-year average of 20x, it is trading significantly above the 10-year average of 18.21x, according to Bloomberg data.

India is the most expensive market in the world now. FPIs have opportunities to invest in much cheaper markets and, therefore, their priority is markets other than India, according to V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

India’s inclusion in global bond indices and attractive yields have attracted FII flows. Also, FPIs are buying in the debt market mainly because the Indian Rupee (INR) has been stable this year and this stability is expected to continue, Vijayakumar said.

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