Indian rally could halt or see a correction: BofA-ML

In a report on Tuesday , Sanjay Mookim and Anand Kumar of Bank of America Merrill Lynch said India has been a beneficiary of the strong inflows into emerging markets but if the tide were to reverse, the domestic equities “may not have the legs to stand on“ irrespective of the long-term growth potential. Below-average dividend yields also suggest limited returns in the near term. In the event of a correction, sectors with higher beta such as corporate banks, metals and industrial sectors are likely to fall more, the investment bank said. It favours sectors such as information technology, consumer banks, pharmaceutical, consumer firms and utilities which have low operational risks.

“Nifty's one-year forward PE (price-to-earnings) is well above average. If one were to ignore the run up during the `Modi' rally post May 2014...then PE multiples appear particularly excessive. That contrasts with forward earnings growth expectations ­ that remain stuck at 16%,“ the bank said.

On a one-year forward basis, Nifty is trading at 18.53 times and Sensex at 18.34 times compared to the MSCI Emerging Markets index which is trading at 11.09 times.