The year started on a bullish note for Indian equities. Nifty was up 4.6% in January being the highest M-o-M rise in last 10 months. India was among the top performing markets others being Brazil (+7%), MSCI EM (+5%) & Taiwan (+2%). Mid-cap outperformance continued with MoM expansion of valuation premium over large-caps.

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The Sensex trades at a P/E of 17.1x, at its long-period average of 17.1x. MSCI India trades at a 35% premium to MSCI EM (historical average premium: 42%. Q3FY17 earnings announced so far have been in line with expectations. For the 90 companies in our universe that have reported results so far, sales/EBITDA/PAT have grown 9%/11.3%/7.4%, as against expectations of 9.1%/136%/11.8%. Management commentary also suggests that the impact of demonetization is less than feared initially.

On the sector front, the gainers were telecom (+19%), metals (+15%), cement (+11%) and utilities (+9%) being the top outperformers for January, while technology (-6%) was the only sector to deliver negative returns.

The FY18 Budget was a fine balancing act, with an emphasis on capital spending, fiscal prudence, rural spending and modest stimulus to select sections (personal income tax cut, corporate tax cut for MSME), even as it kept a tight leash on overall spending growth. Select sectors like housing and infrastructure should be the beneficiaries of the Budget measures.

Markets applauded the fact tax structure for equity participants was left unchanged. All worries and speculation regarding change in tax structure of long-term capital gains or short-term capital gains or securities transaction tax (STT), etc. was put to rest. To ease foreign inflows through direct investment, it has been proposed to abolish foreign investment promotion board (FIPB) and create a new authority where norms are investor friendly. Foreign institutional investors (FII's) were provided further relief as the concession of low 5% withholding tax for FII-bond investors in India was extended by three years till 2020. FII's are likely to return aggressively as India stands tall when compared to global peers from equity allocation perspective.

With the Budget overhang behind, the market attention should revert to fundamentals and corporate earnings, in our view. Near-term challenges exist in the form of impact of demonetization, commodity inflation and regulatory-related cost inflation. However, demand recovery in domestic market and speedier re-monetization is likely to speed up normalcy. Housing finance companies, FMCG, infra, cement, metals, farm equipment manufacturers, low-cost home developers are key beneficiaries of budgetary measures. Markets likely to trade firm where corrections will be bought into. We expect high liquidity boosted by returning FII's and continued inflow of domestic institutional investors to take market to new highs soon.

The writer is head, retail research, Motilal Oswal Securities Ltd