India: Frame-by-Frame

- Maintain a Neutral bias on the market "The market continues to remain resilient with YTD gains now exceeding 6%. Among the larger markets in Asia, India’s outperformance has been strong, despite macro worries on inflation and the current account deficit. We believe that inflation concerns should start to abate as base effects begin to kick in. On the flip side, we see some patches of slowdown in the economy and expect mild near-term weakness in industrial production numbers. We retain our Neutral bias on the market."
- Near-term weakness in activity and peaking inflation "Systemic liquidity has eased somewhat since the tightness in June and July, which coincided with large outflows on account of telecom auctions. Meanwhile, real activity indicators suggest a slowing down of economic activity in the near term, the pace of which has been hastened by supply constraints and unfavourable base effects. Inflation has most likely peaked as agricultural output normalises this year and global commodity prices remain close to flat on an annual basis."
- Fund flows — allocations have favoured debt over equities "Fund flow activity reveals that FII flows have moderated in both equity and debt markets in August. That said, FII inflows into debt in the year so far stand at a record high. Domestic mutual funds have continued to be net sellers of equities and have instead channelled funds into debt instruments. The supply of paper in the primary market has come off during the past few months amid market volatility and global uncertainty."
- Consensus earnings — largely flat "Consensus earnings estimates for the Sensex are largely flat YTD. Autos, banks, oil & gas and media have seen the largest upgrades, while telecom, real estate and capital goods have seen the largest cuts in consensus earnings estimates."
- Valuations not cheap "The 12-month forward consensus-based market earnings multiple at 15.6x stands at a slight premium to its five-year average of 14.8x. With respect to regional peers, the Indian market does look a bit expensive at current levels."

Nomura India Equity Strategy Monthly Sep2010

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