Concerns over an economic slowdown and rising interest rates have made investors reluctant to pay a premium for Indian equities. This is the trend globally as well.
Reflecting this, the one-year blended forward price-earnings ratio of benchmark indices has fallen below their 10-year average.
According to Bloomberg data, The BSE Sensex is currently trading at 19.05 times its one-year blended forward earnings, at a discount of nearly 140 basis points to its ten-year average of 20.48 times. The Nifty50 index is trading at 18.09 times its one-year forward earnings, below its ten-year average of 19.93 times.
However, analysts caution that the discount from the ten-year average alone does not necessarily make Indian equities attractive. During bearish times, markets can trade significantly below their multi-year averages for extended periods.
“This point is one of the trigger points for starting to buy. However other factors like earnings growth forecasts for the next two years, interest rates and their trend and other qualitative triggers also need to be considered before getting excited to become large buyers,” said Deepak Jasani, Head of Retail Research, HDFC Securities.
Better than global peers
To be sure, Indian markets still command a rich valuation compared to their peers across the globe. The MSCI World index is trading at 15.86 times its one-year forward PE, at a discount of nearly 300 bps plus to Indian equities.
Many global equity markets are currently trading at a discount to their 10-year average in terms of their one-year forward price-to-earnings (PE) ratio. For example, the S&P 500 has a one-year forward PE ratio of 17.87, which is lower than its 10-year average of 18.81x. Similarly, the FTSE100 trades at 10.36 times, representing a discount of almost 448 basis points from its 10-year average.
The Dow Jones has a one-year forward PE ratio of 16.53, compared to its 10-year average of 17.86. Additionally, the CAC40, DAX and Nikkei indices are trading at a discount of approximately 300 bps, 292 bps, and 400 bps, respectively, from their 10-year averages. Hong Kong’s and China’s Hang Seng and Shanghai's one-year forward PE are trading below their 10-year average. Only South Korea’s Kospi index one-year forward PE is trading marginally higher than its 10-year average.
According to analysts, the Indian market is expected to undergo a period of consolidation due to several factors, including expensive valuations of ‘growth’ stocks in areas such as consumption, investment, and outsourcing; an anticipated decrease in earnings in discretionary consumption sectors; and the high chance of interest rate cuts in the next 3-4 quarters. Additionally, the Q3FY23 net income of the Nifty-50 Index fell slightly below expectations.
“We note increasing risks of a tighter monetary policy in India following higher global policy rates and upside risks to domestic inflation, if domestic food and global fuel prices were to surprise negatively,” said Shrikant Chouhan, Head of Equity Research (Retail), Kotak Securities Ltd.
“Meteorologists have suggested increasing risks of El Nino in 2023, which may somewhat be countered by a projected positive IOD (Indian Ocean Dipole). A further 25-50 bps increase in repo rates will take the monetary policy above pre-Covid levels.”
In the last five sessions, both the Sensex and Nifty declined nearly 4.5 percent each while so far this year both have lost over 5 percent and 6.3 percent, respectively. The BSE MidCap and SmallCap lost nearly 5 percent and 6.66 percent, respectively, year to date, and 3 percent each in the last five sessions.
Analysts pointed out that banks and financials are the only sectors trading at reasonable levels, but below their pre-Covid values.
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