Valuations of equity markets are at slightly above historical averages as high inflation and energy prices, has led to some downgrade in Nifty earnings. We feel that the recent volatility in equity markets would continue for some more time, may be for another three to four months.
As the global macro situation resolves, and as the recovery in the Indian economy deepens, corporates have huge scope for operating leverage, which can drive financial growth in the coming quarters. This will lead the Indian economy to bounce back strongly. We feel the domestic cyclicals, be it consumption-oriented or investment-oriented, would lead the economic recovery. The key advantage India has over many emerging markets is that we have a strong domestic demand base, and our economy is less dependent on exports and global commodity cycles.
Thus, domestic cyclicals such as auto and auto ancillaries, consumer durables, real estate and building materials, capital goods and engineering, infrastructure related sectors should do well. Within defensives, pharma and healthcare sector should do better as it comes out of a low growth phase. While the IT sector is facing a threat of global recession, post the correction the sector in the past 6 months, valuations are more reasonable now, leading us to have a neutral stance on it. We are also maintaining a neutral position in the financials space.