Macro fundamentals improving, but risk-reward unfavourable: BNP Paribas

'Defying global trends, Nifty 50 has outperformed most peers year-to-date and is trading at 19.2 times, 21% above its long-term average, taking the earnings yield-bond yield gap below 2%'

Domestic macro fundamentals are improving, but slowing global demand and expensive valuations mean unfavourable risk-reward for equity investment, BNP Paribas has said in a note.

“Defying global trends, Nifty 50 has outperformed most peers year-to-date and is trading at 19.2 times (12-month forward price-to-earnings), 21 per cent above its long-term average, taking the earnings yield-bond yield gap below 2 per cent. Amid slowing global demand, lofty market valuations, a slowdown in retail flows and lack of positive catalyst for our earnings estimates, we remain cautious on the overall market returns in the near term,” said Kunal Vora, Head of India Equity Research, BNP Paribas in a note.

The brokerage has an overweight (OW) stance on the banking sector thanks to “improving credit growth and stronger and cleaner balance sheets”. Also, the sector trades below its 10-year average P/E. IT and pharma are the other two OWs. On the other hand, it is underweight on auto, consumer staples and consumer durables, “where the valuation comfort after the recent run-up is low.”