Valuations of the equity market could see further compression if the US Treasury yields climb towards the 4 percent mark, Sanjay Mookim, head of research at JP Morgan India, told CNBC-TV18 in an interview.
Mookim argued that at 4 percent US bond yields, equity valuations will have to revert to their levels seen in 2010. Mookim also warned that the Indian equity valuations have not yet fully priced in the prospects of aggressive interest rate hikes by the US Federal Reserve given that they are nowhere close to their 2018 levels when US bond yields were last at 2.8 percent level.
“We do see risk of aggregate equity multiples coming off from their COVID high due to Fed tightening,” Mookim said.
Domestic benchmark equity markets have fallen 7-8 percent from their record highs hit in October 2021 led by losses in growth-oriented sectors. Higher global bond yields have compressed the high valuations afforded by investors to several technology stocks as they tend to move inversely.
That said, Mookim argued that there are no major triggers in the domestic economy to suggest that Indian equity markets could fall sharply over the next few quarters. However, any drawdown will likely be driven by global factors.
Mookim said that he remains underweight on metal stocks even though he expects current higher prices of commodities to sustain until there is de-escalation in the Ukraine-Russia crisis or further slowdown in demand in China.Mookim also warned that defensives and commodity stocks could see limited upside from current level given that these stocks have moved higher as investors sought safety from the ongoing market volatility.
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