Stocks
Kotak sees no pockets of value in the current market
The rally in bonds and equities of emerging markets post ‘Brexit’ referendum may slow down (if not reverse), according to Kotak Securities. This is due to a potential policy normalisation by the US Federal Reserve over the next few months and limited potential of accommodation from other central banks. Besides, Indian stocks have rallied so much recently that there is no attractive value left in the market, thinks Kotak Securities. “Fundamentals of the Indian market are good, but not as great as what stock prices make them out to be,” says a report released today. The firm expects modest future returns. It is difficult to find good opportunities in the Indian market given the current valuation scenario. 
 
It expects the earnings for Nifty-50 companies to rise by 15% in FY16-17. Among the different sectors, cement, media and metals will be out-performers. Earnings for metals and mining sector are expected to rise by a whopping 51%. However, the low base effect for the sector has to be taken into consideration – earnings for FY15-16 fell by 20.7%. Earnings for cement and media are expected to jump by 46.7% and 32.9% respectively in FY16-17. Telecom and energy are expected to be laggards in Nifty – 50 with their earnings expected to decline by 9.7% and 3.9% respectively. 
 
 
Sectoral Outlook: Kotak Securities does not have a very positive views on consumption, Information Technology (IT) and pharmaceutical sectors. Valuation in consumption sectors is very rich. In certain cases, they are ‘absurdly rich’ as per the report. It has worsened in certain external sectors like (IT) and pharmaceuticals. 
 
Bond Markets: The bond yields in developed markets have fallen to low levels given the policies fallowed by central banks. The yield in bonds has not declined much. However, it hardly means that risks have declined. There is a difference in nominal yields for government bonds for emerging markets and developed markets. However, according to Kotak Securities, this is due to inflation differential due to which the ‘nominal’ benefits would be nullified in theory. 
 
The world is flush with liquidity. A whopping US$ 26 billion has been invested in global equities and bonds in the past 3 months. Global asset prices have risen in the past 5-6 years due to sustained purchases of government bonds, corporate bonds and equities. In addition, low interest rate policies have added fuel. What would happen if the global liquidity were to reduce? This was a question that Kotak Securities sought to answer. They carried out a mental exercise to find out the valuation multiples of various sectors and high profile stocks in India? In order to do this, they assumed a cost of equity of around 12% and the long-term risk-free rate of around 7%. In several cases, this exercise fetched a 20-40% lower multiple. According to Kotak Securities, the current re-rating in Indian equities is due to analysts using ‘global cost of equity’ as opposed to cost of equity for Indian markets as bond yields have come down dramatically in developed markets. 
 
Markets are looking at the direction of US Federal Reserve policy to sustain the recent market rally. The US economy has gradually strengthened, especially in the area of employment. With this along with US Fed governors’ comments, the global markets have marginally recalibrated their expectations of an increase in US Federal Reserve rate. Kotak Securities has pegged the probability of US Fed rate increase by December 2016 at 44%. 
 
Changes in Model Portfolio 
 
Kotak Securities has dropped Tata Consultancy Services (TCS) from its model large-cap portfolio due to expensive valuations as compared to other Tier 1 names. Earnings and revenues in dollar terms for the sector have remained relatively stagnant. It added Indigo (InterGlobe Aviation) and transferred Petronet LNG to this portfolio. It also reduced Indian Oil Corporation’s weight in its portfolio. 
 
It has entirely dropped its recommended mid-cap portfolio on valuation concerns as there is not much upside left for stocks in its portfolio. Out of 11 recommended stocks, five stocks were trading either above or close to 12-month fair valuations. It has not created a portfolio with a small number of mid-caps as it believes that a basket approach works best for mid-caps. According to Kotak Securites, only some stocks in infrastructure and real estate sectors offer some meaningful upside from a 12 month time horizon.

User

COMMENTS

SURESHWARAN PARAMESHWARAN

3 months ago

In my view, Metal & mining are not winning horses in long term

SASIKUMAR M

3 months ago

Why is NALCO trading low when compared to HINDALCO ? HINDALCO has give 100% returns in past 6 months, NALCO is just 40% ?

Madhusudan I. Mistry

3 months ago

I would have appreciated the complete tabular form of their model portfolio along with 'before' and 'after' the above mentioned modification.If possible, please do provide for guideline and analysis purpose. Thank you!

R Varadarajan

3 months ago

I fully agree. The current high prices are due to hype created by better monsoon, GST, etc. etc which will not hold any substance with regard to valuation. Some odd stocks will move up suddenly while some others would fall. The current prices appear to be totally manipulated for the benefit of whom, I wonder.

Mahesh S Bhatt

3 months ago

Good read Manipulated costs of easy capital in developed markets super easy money policy effects of developing markets needs to be measured & reverse accounted to developed economics Difficult Mahesh

SRINIVAS SHENOY

3 months ago

What do you think?... Write your comments The analysis by Kotak securities I feel is reliable. Infrastructure and real estate sector, cement stocks I feel at this juncture are attractive, considering that they did not participate much in the upside rally, though most other stocks had reached their 52 weeks high.

Nifty, Sensex may continue to rally – Wednesday closing report
We had mentioned in our Tuesday’s report that Nifty, Sensex has broken out of its trading range. Today too the benchmarks made an upmove. From here we see Nifty, Sensex continuing to rally further.
 
 
India VIX closed at 13.2425, up 1.71%. NSE recorded a turnover of 146.79 crore shares.
 
Nifty and Sensex hit their new 52-week highs again today. The benchmark indices initially opened on a flat-to-positive note on Wednesday prompted by mixed cues from Asian and European markets. Market awaited the announcement of the gross domestic product (GDP) data for the first quarter of 2016-17, among others.
 
In addition, the upward trend of the indices continued as foreign institutional investors (FIIs) resorted to buying activities, unleashing a fresh inflow of funds.
 
The indices marginally capped gains due to a sharp up-move in the dollar index and lower crude oil prices and pulled the markets back from their morning peak levels.
 
However, gains in the rupee's value kept the market sentiment buoyed to close with appreciable gains. 
 
The rupee appreciated by seven paise to 66.96 against a US dollar from its previous close of 67.03 on Tuesday.
 
In terms of investments, provisional data with the exchanges showed that the FIIs purchased stocks worth Rs 854.19 crore and the domestic institutional investors (DIIs) bought scrips worth Rs 847.70 crore.
 
The top gainers and top losers of the major indices are given in the table below:
 
 
 
The closing values of the major Asian indices are given in the table below:
 
 
 

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COMMENTS

tapan sur

3 months ago

If IT,infrstructure,utilities,telecom are not showing improvements,& consumption of metals,cement,industrials are showing growth, this growth may not write the story of actual economic growth, we may be heading towards stagflation.If demands are good why is anything to do with digital like telecom,IT & so on not doing so well if this sector came with no alternative to economic activity & economic growth?I still maintain post 2017,we may get a restless market,so we need to be cautious with our spendings,& concentrate a little more on our savings,to take care of any imminent needs that may arise with this type of "In-The-Air growth".

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