The market is showing signs of caution ahead of the Union Budget 2021. On January 18, market benchmarks the Sensex and the Nifty fell about a percent each while the Mid and Smallcap indices suffered losses of about 2 percent.
At the record high levels, market valuation is stretched and consolidation is expected, experts said.
The rich valuation of the market warranted caution as the economy is still not out of the woods and the doses of liquidity may not keep the market aloft for a long time without getting support from fundamental indicators.
Nifty ended the year 2020 with a gain of 15 percent even as COVID-related concerns persisted.
Experts point out that an 80 percent reduction in active COVID-19 cases since September 2020, strong September quarter corporate earnings, which resulted in upgrades and faster than anticipated economic and demand recovery along with a supportive liquidity and interest rate backdrop provided the triggers to the market.
All this pushed the market to record highs and at this juncture, the valuation of the market looks stretched.
Binod Modi, Head Strategy at Reliance Securities, underscored on earnings parameter Nifty is currently trading at 28 percent premium of its historical average of one-year forward earnings multiple, which certainly looks to be stretched.
However, a holistic look towards other parameters like market-cap to GDP and spread of G-Sec and market earnings yield indicates that the market may still witness some up-move, said Modi.
"Additionally, the spread between 10-year G-Sec yield and Nifty earnings yield is 130bps as against a historical average of 188bps that still favours the equities. However, these figures certainly indicate towards caution as the market is nearing peak on all parameters," said Modi.
High valuation is always seen as a major reason behind a market correction.
However, it does not make much sense to emphasise so much on a single parameter.
Deepak Jasani, Head of Retail Research, HDFC Securities, said P/E may not be the right valuation measure in current times of once in a lifetime special circumstance of pandemic and plentiful liquidity. Also, lower interest rates should support higher-than-median valuations.
"While going by historical standards, our markets definitely seem expensive. However, in the face of the disruption seen over the past few years in India and the world, whether the Indian corporate sector needs to
be rerated upwards given their resilience and adaptability, falling debt levels, rising inclination towards capital efficiency in the background of India’s potential for economic growth is a moot point," said Jasani.
Jasani is of the view that the Indian market’s major upside may only come from upgrades to FY23E EPS (currently up 21 percent YoY), and better medium-term growth prospects.
Post Q3 results, if the street realises that the stocks (and the market) are overvalued or have run-up ahead of time, then the market may see a correction.
Budget disappoints in terms of levy of fresh taxes or surcharges, fiscal indiscipline and possibilities of interest rates rising sharply are also the risks for the market.
There are other factors also that can trigger a deep fall in the market such as rising interest rates globally, debt to GDP ratio of countries and institutions at dangerous levels, geopolitical concerns, COVID pandemic not coming under control and a sustained rise of US dollar.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.