“The Niftys 8 per cent move off its Mar 18 (2018) lows has come amidst rising bond yields. While the PE (price to earnings) has not touched a new high since then, the other relative value indicators — gap between earnings yield and bond yield and the risk premium are flashing red,” said CLSA.
The firm said the 10-year bond yield is unlikely to cool off this time around given the recent rate hike by the Reserve Bank of India, weak fiscal situation and a worsening inflation outlook. The 10-year benchmark bond yield breached 8 per cent recently—for the first time since December 2014.
A price-to-earnings multiple correction remains a strong possibility, said CLSA.
The firm added that the gap between bond yield and earnings yield is at a near record high at 2.2 per cent but history suggests that such gaps do not sustain.
BULLISH ON HEALTHCARE
Healthcare is now an overweight sector in the portfolio and is now showing signs of investor sentiment bottoming out, said CLSA.
“Indian pharma sales in the US have stabilised sequentially and the commentary on pricing pressure has been improving. Valuations are reasonable in the sector,” said CLSA.
The firm has included Sun Pharmaceutical Industries in its model portfolio with a weightage of 2 percentage points and removed JSW Steel.
CLSA that the drug makers earnings have bottomed out in the financial year ended March with specialty monetisation underway and USFDA compliance problem behind it with the resolution of Halol plant issue. The firm, which has a buy rating on Sun Pharma with a target price of ?600, expects the companys recurring earnings to double over FY18 and FY20.