IGI Logo

NIFTY 50 VALUATION

* Nifty 50 forward PER at 17.5x is slightly below 10-year average but still above the 15-20 year average (Source: Bloomberg)

* India’s valuation premium to other emerging markets has corrected from 70% to about 55% in last 3-6 months, especially due to rise in domestic bond yields and crude prices.

* The valuations are simultaneously adjusting to the fact that the interest rate environment in which we have lived for the last ten years, is changing too and thatis resulting in a downward pressure on the equity valuations.

* In January’22, the market reacted to the indication of FED turning hawkish. Markets searching for equilibrium between scenariosranging between mild globalslowdown to a deep recession. Volatility likely to continue.

* Going ahead, for Indian equity markets also faces twin headwinds of slowing Nifty50 earnings growth as well as higher interestrates.Nifty50 aggregateEPS growthfor FY23 hasslowed from18-19%to 14% over last 6 months.

* Meanwhile, the recent valuation correction provides some cushion to equities notwithstanding the chance of earnings slowdown in FY23. Volatility and rangebound movement might become the norm in the short term 96-9 months).

* Improvement in investment cycle and cyclical recovery are positives from a medium to long term (3-5 years) perspective which will sustain India’spremium valuationsover other emerging markets.

VALUATION IMPACT ON SEGMENTS & SECTORS

* When interest rates go up, the valuation of expensive or thematic sectors (sectors which expect profits 3-4 years in the future) tend to get impacted much more than companies which are steady growth or steady profit generating where valuations are reasonable

* We have seen growth, quality, thematic sectors and profit-less concept stocks performing better over the last 5-6 years in the low interestrate regime. As interestrate cycle turns, ability of those sectorsto outperformmay reduce significantly.

* The portfolios therefore need to be aligned to the new reality of interest rates. Value segment and steady profitability at reasonable valuations may perform relatively better.

* In phases of economic recovery combined with higher interest rates, cyclical sectors do well i.e. Banks, industrial & capital goods, cement, utilities, autos etc. and some part of commodities.We are positioned for cyclicalrecovery in these sectors.

* The way to manage or create alpha in a market like today which might remain range bound for some time is to be in slightly more value conscious sectors or stocks and also to be in the cyclical sectors because we are seeing a cyclical recovery

* Our investment philosophy of Growth at Reasonable Price (GARP), means our portfolios have been averse to Quality-atany-price or High PER stocks/sectors. This is likely to be an advantage as the market paradigm changes with inflexion in interestrates

To Read Complete Report & Disclaimer Click Here
 

Above views are of the author and not of the website kindly read disclaimer