CLSA raises concerns about India’s stretched valuation, bullish on RIL, HDFC Bank, ONGC, Infosys

financialexpress.com:

In a recent report, foreign brokerage firm CLSA has expressed caution regarding the current valuation levels in the Indian stock market, describing it as not only stretched but also the most expensive large market globally. 

Despite remaining bullish on certain stocks, including  Reliance Industries, HDFC Bank, ICICI bank, Infosys, L&T, Axis Bank, Sun Pharma, Oil & Natural Gas, SBI Life Insurance, IndusInd bank, Hindalco, and ICICI Prudential life, CLSA warns that the elevated starting point may impact returns in 2024. 

The report notes that Indian equities began the year with extreme bullish sentiment, boasting top-decile valuations and a record discount to debt yields. The Nifty’s Price-to-Earnings (P/E) ratio stands at 20.2x, a level witnessed on only 8% of days over the past 18 years.

 The market’s valuation premium to its historical average is the highest among the 19 largest global markets. However, it is no longer the leader in earnings-per-share (EPS) growth, raising concerns for potential reversals.

CLSA emphasizes that India has become the most expensive among the world’s largest markets, trading in the top decile of its historical range. This puts the country at risk of correction in case of narrative or earnings growth disappointments. 

The report highlights the possibility of a rotation of investment flows away from India if other large but attractively priced emerging markets show improvement in their investment narratives.

Furthermore, the Nifty earnings yield discount to the Indian 10-year government security yield is at 2.2 percentage points, a level observed on only 3% of days since 2005. This position historically resulted in negligible one- and two-year returns. CLSA warns that any significant growth