The Sensex is pricing in 12% nominal industrial growth. The market is pricing in an 80bp rate cut by the end of F2013. The market’s P/B is implying a long-term return of 15%, which we think is a good return in the context of India’s equity risk premium.
Cyclicals look ultra cheap relative to defensives [FMCG, Pharma]. Correlations of stocks with the Sensex have declined since their January 2012 peak, warranting wider sector positions. Valuation (P/B) dispersions could also be peaking, and mean reversion is possible – implying narrower valuation gaps between cyclicals and defensives.
At the sector level, stock-picking opportunities persist in financials, industrials and materials whereas other sectors are demanding a macro
approach.
