India's stock benchmark Nifty 50 looks 10% overvalued when forward earnings yield is measured against expected growth, profitability, volatility and 10-year government bond yield, according to Kotak Institutional Equities.
The fourth quarter of the calendar year has been seasonally the weakest for the Indian equity market, the brokerage said.
Valuations based on the forward earnings yield and the upcoming seasonally weak period "make us cautious about the index's expected returns in the next three to six months", Kotak said in an Oct. 3 note.
Seasonality Headwinds
There were marginal cuts to FY24 and FY25 earnings per share estimates in September. If these estimates are cut further, the disconnect between the index fundamentals—expected growth going down while index forward earning yield going further up—can only be bridged by a fall in the index prices, the note said.
"We also note that the VIX continues to stay at a very low level, and the likely direction for it is to move up rather than down," Kotak said.
Sentiment Portfolio
The concentrated sentiment portfolio performed extremely well in September, delivering more than 10% returns, and has delivered 41% annualised returns, the brokerage said. The rest of the factors also outperformed in September.
"Both the all-season portfolios outperformed in September and continue to outperform the index on a risk-adjusted basis, as do all broad single-factor portfolios," the note said.
The BSE-200 and Nifty-optimized momentum portfolios also outperformed their respective benchmarks, returning 4.3% and 4.2%, respectively. While index volatility and pairwise correlations remain low on an absolute basis, there was a month-on-month increase in pairwise correlations, it said.
October Portfolios
The October 2023 concentrated all-season portfolio consists of Nestle India Ltd., Cipla Ltd., Bajaj Auto Ltd., Tata Consultancy Services Ltd., and Infosys Ltd., the note said.
Kotak replaced ITC Ltd. and NTPC Ltd. with Infosys and Cipla in the October concentrated all-season portfolio.
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