Mumbai: At first glance, things seem fine for Indian equities. But a closer look at the performance of key benchmark index Nifty50 would show that Indian equities remain a tale of stark divergence. In fact, things have become worse on this front.

An analysis by Motilal Oswal Securities Ltd showed that within the Nifty50, top 15 stocks delivered 30% returns, rest are down 11% over December 2017-June 2019. The Nifty itself has risen 11% during this period thanks to the rally in large stocks.

According to the brokerage house, valuations too show a stark picture of divergence. The stocks that have rallied are trading at a significant premium to their long-term average valuations, while others are trading at a discount to their historical valuations.

“This polarisation on performance and valuations clearly underscores two things: investors taking continued refuge in the quality/earnings predictability theme in an environment of economic slowdown and there is a lack of pick-up in broader market’s earnings," it said in a report on 25 June.

Moderating domestic consumption, concerns around liquidity and limited clarity on monsoon would make earnings revival difficult. Globally as well, economic growth scenario is not very upbeat on the back of trade wars.

Despite that, Indian equities continue to trade at premium to emerging market peers. The MSCI India index is trading at one-year forward price-to-earnings multiple of 18 times. This is much higher than the 13 times of the MSCI Emerging Market index.

Even though India may not be a direct casualty of the trade war, internal worries cannot be ignored and hence this valuation multiple should moderate further.

Meanwhile, apart from June quarter earnings for fiscal year 2020, the upcoming Union Budget is among the key near-term triggers for the market. One of the expectations is that the government would announce steps to boost consumption and liquidity. But given the fiscal constraints it will be interesting to see how the government achieves it.

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