CLSA on Thursday said the decoupling of domestic bonds and equity vis-a-vis global peers is unsustainable and is a reflection of lack of margin of safety. ┬а
In its latest strategy note, the foreign brokerage noted that the difference between 10-year Indian bond yields and US GSec (government securities) yields have narrowed to a 13-year low of 3.3 percentage points.
This has been seen at a time Indian equity valuation premium is at near-record against peer markets as well as to domestic bonds, indicating decoupling for Indian bonds as well as equity markets.┬а
“We do not expect this to be sustainable and regard it as indicative of a very low margin of safety,” CLSA said in its largest strategy note.┬а
CLSA said a simple valuation mean reversion anchored on bond yields indicates fears of 30 per cent downside in the Nifty!
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To be sure, the US 10-year bond yield has jumped 150 basis points in less than two months to about┬а
4 per cent, an almost 14-year high. In comparison, CLSA said, the Indian 10-year government bond yield has risen only 25 basis points from its recent lows to 7.3 per cent.┬а
CLSA said India is the only market other than the US where equity valuations are extended versus┬а
domestic bonds. At about 2 percentage points, the difference between IndiaтАЩs 10-year GSec yield and┬а
the NiftyтАЩs earnings yield is at a point at, which negative equity returns usually ensue, it suggested.
“The NiftyтАЩs absolute PE is slightly below +1SD of its historical average and at levels ┬аwhere positive equity returns are usually not forthcoming. At the 98-99th percentile, ┬аIndiaтАЩs relative valuation to EMs and Asia ex-Japan is also near record highs,” CLSA said.
A simple mean reversion could drive a deep pullback, CLSA warned.┬а
