A global recession is bound to dampen market sentiment significantly, irrespective of the geography to which the market belongs. Tough times prompt consolidation and cutting down riskier bets which explains why Indian equities have seen a flood of dollar outflows. Though this has changed recently, it punctured valuations of listed companies to a large extent.
As the above chart from Motilal Oswal Financial Services shows nearly half of the companies housed in the Nifty index still trade at a discount to their long-term average price-to-earnings. Notably, firms belonging to the automobile and banking sectors have seen depressed valuations despite sharp gains in shares in recent times. Analysts believe that this presents opportunities for investors.Given that India’s structural growth prospects are still far better than its emerging market peers, the earnings outlook for companies here hasn’t turned for the worse. Headwinds from elevated inflation and tightening policy are seen as temporary. Indeed, the current rate hike cycle could be a short one if recession becomes a bigger problem. That gives investors looking for long-term exposure to quality balance sheets an incentive to take advantage of depressed valuations. Perhaps bottom fishing is not over yet for the markets.