Indian stock market in extremely bullish zone, warns CLSA after one-way rally

Following a 10% rally in the last three months that took Sensex and Nifty to record peak levels, the Indian stock market is now in an extremely bullish zone if a CLSA indicator is to be believed.

"Investor sentiment as measured by our proprietary India Bull-Bear Index has swung from an extreme-bearish reading of 8.2% in mid-March 2023 (Contra BUY time) to an extreme bullish 95.9% reading," CLSA said in its latest strategy report on Thursday.

Nifty's 12-month forward PE is now nearly +1 std. of its long-term average and its valuation premium versus the emerging markets and Asia Ex-Japan has also risen to +1 std.
"When compared to respective historical trading ranges, the US, Taiwan, and Korean equity benchmarks are more extended than India," CLSA said while noting that India’s equity valuations versus bonds are still shy of the warning level.

Nifty FY24/FY25 EPS was cut by 1.0%/1.4% during the quarter, but India is still expected to be the highest earnings growth market, it said, adding that limiting further cuts in the upcoming earnings season will be important.

CLSA's India focus portfolio is overweight in banks, insurance, energy, and real estate, while IT, staples, and discretionary ex-autos are our top underweights. "Our portfolio favours value companies given the ongoing tactical rally," it said.

In the June quarter, Nifty rallied 10.5% and was the 4th best-performing index after Brazil (+15.9%), Japan (14.2%), and Russia (14.1%).

Many analysts have been warning against overheated valuations in the Indian market following the one-way rise.

Nifty’s 12-month forward PE increased from 17.4x at the start of the quarter to 18.6x, a 17.7% premium to its average.

"Only about 17% of the trading days since 2005, the Nifty has been more expensive than the current PE. Taiwan (91st percentile), the USA (90th percentile), and Korea (89th percentile) are at more extended valuations than India, considering their respective historical trading ranges. This outperformance has taken India’s valuation premium to the EM as well as Asia ex-Japan benchmarks to +1 std. of the long-term average. India’s valuation premium versus China is also well above the past 10 and 15-year averages," said CLSA's Vikash Kumar Jain.