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As stocks sprint, should surging valuations worry investors?

India’s stock markets are the most expensive in Asia and emerging markets currently. Compared to the Asia-Pacific region, it trades at an elevated PE premium of about 80 percent.

November 25, 2022 / 09:35 AM IST
In November so far, foreign institutional investors (FIIs) have poured Rs 27,396 crore into the equity market

In November so far, foreign institutional investors (FIIs) have poured Rs 27,396 crore into the equity market

As BSE Sensex climbed to an all-time high level on November 24 amid firm global cues and continuous money flow from domestic as well as foreign investors in the last few weeks, its valuation also turned expensive.

As per the latest data, Sensex currently trades at a trailing twelve-month (TTM) PE of 23.47, nearly 600 basis points higher than the 10-year average PE of 17.50. However, the valuation right now is relatively cheaper than what it has been in the last 30 peaks, an analysis shows. The last time Sensex was cheaper than now despite being at an all-time high level, was in June 2017.

PE stands for the price-to-earnings ratio.

Its peer Nifty 50 index is also very close to all-time high levels. Its TTM valuation at 23.27 PE is also over 630 basis higher than the 10-year average PE. On a 1-year forward basis, the index trades at 20.61 times its earnings.

On November 24, at the close, the Sensex was up 762.10 points or 1.24 percent at 62,272.68, falling slightly after hitting a fresh peak of 62,412.33 while the Nifty was up 216.80 points or 1.19 percent at 18,484.10. All time high for the Nifty is 18,604.

India’s stock markets are the most expensive in Asia and emerging markets currently. Compared to the Asia-Pacific region, it trades at an elevated PE premium of about 80 percent.

Analysts, however, are not much concerned about valuations. They see further upsides in the index buoyed by relatively higher earnings growth. Though a few have tapered down their expectations.

“Going forward we expect the positive momentum in Indian markets to continue buoyed by positive global cues and fall in crude oil prices to a 10-month low,” said Siddhartha Khemka, Head - Retail Research, Motilal Oswal Financial Services. “Once the Nifty is able to cross its previous high of 18,604, we expect the index to gradually inch up towards 19,000 levels over the next few weeks.”

In November so far, foreign institutional investors (FIIs) have poured Rs 27,396 crore into the equity market, including investments into initial public offers, NSDL data shows. The previous two months had seen net outflows.

Domestic institutional investors (DIIs), which include mutual funds and insurance companies, have also been net buyers in the previous six sessions, taking indices higher. Data for November 24 is not available yet. However, for the month, DIIs have pulled out a net Rs 1,057 crore from equities.

 

Bars in chart represent PE levels when Sensex hit a high. Bars in chart represent PE levels when Sensex hit a high.

“While we remain bullish on India’s long-term prospects, high starting valuations and these near-term cyclical considerations prompt a market weight stance to start the year,” wrote Sunil Koul of Goldman Sachs.

Koul said he expects Nifty to reach 20,500 by 2023-end led by mid-teen earnings growth and a modest PE compression. He believes that light foreign positioning and geopolitical factors could support India’s multiples.

As 2023 unfolds, doubts are emerging whether Indian equities will outperform global stocks for the third successive year as China and other globally cyclical Asian markets could perform better on China reopening catalysts and global recovery expectations in 2024. But, not everyone agrees.

In the initial response to Moneycontrol Market Sentiment Survey, two out of three money managers disagreed and said India will outperform both the US and China markets.

Expensive sectors

Barring the BSE Metal index, all sectoral indices traded at a hefty premium to their respective 10-year average PE level. Four of them – BSE Consumer Durables, BSE Consumer Discretionary, BSE Realty and BSE Auto – trade at nearly 100 or more percent premium over the long-term average.

For some indices, the premium has widened in recent months as the constituent stocks have rallied. This is especially true for the auto sector where names like M&M have seen record-high levels recently.

Disclaimer: The views and investment tips expressed by investment 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.
Shubham Raj has five years of experience covering capital markets. He primarily writes on stocks with special focus on PMS-AIF industry, telecom and new-age companies. His last stint was with The Economic Times where he wrote on stock markets and led IPO reportage.
first published: Nov 24, 2022 06:15 pm