But, will the optimism sustain? Have the markets
factored in most positives post the resumption in economic activity after a stringent lockdown to battle the Covid-19 pandemic?
Though most analysts expect the global central banks to keep the liquidity tap open that should keep the markets supported, valuations of the Indian markets, they say, are beginning to look stretched. In this backdrop, they remain cautious with some even expecting a minor correction from here on.
After the sharp rally in the Indian equity market, valuations have become expensive, even for mid-caps. The Nifty Index is valued at 12-month forward PE of 21.2, which is more than two standard deviations above its 10-year mean, while the Nifty Midcap 50 Index trades at 20.6, one standard deviation above its 10-year average. Given earnings surprises and the unprecedented support from global central banks, the confidence is back in equity markets. Additionally, corporates in India have seen massive amount of capital raise in several sectors suggesting foreign equity capital is freely flowing into India. These factors combined with low interest rate environment globally will likely keep the valuation elevated, in our view.
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A decline in potential growth and economic transition would pressure India equity multiples. We advise minimal or reducing exposure to sectors linked to growth / investment cyclicals like financials, materials and energy (ex-Reliance Industries). We recommend focusing on consumer, services and healthcare-oriented companies from a long-term perspective.
The index captures a large part of economic recovery optimism and would recommend being more stock specific, which illustrates quality of earnings, sustainability of growth prospects and possesses fundamental moat. We remain positive on rural economy and resilient sectors like information technology (IT), pharma and private banks.
We downgrade our stand on the Indian equity markets to negative after the stupendous rally from the March lows. The Nifty is now less than 9 per cent from its all-time high, and this for one of the worst earnings / GDP readings seem surreal to us. We expect a reality check to set in sooner than later and lead to normalisation of valuations. While we are not calling for any specific levels or time frames at this juncture because there will be too many variables at work here. What is more pertinent aspect that we want to call out for a correction is to let the markets digest the barrage of new aspects of businesses that will emerge – and for some of the heavy weights like financials, consumer, discretionary, manufacturing and many others.
Some correction in the global equity markets starting from the US markets is inevitable. In 2000 and 2007, the ratio of US Market cap to GDP crossed 100 per cent and then the US markets fell quite badly. Now the ratio stands at a record high of 177 per cent. As worldwide a large number of jobs are lost, it is quite logical that many investors would start booking profits at some point in time in the short-term itself. Hence, in our view, the same could lead to around 5 per cent correction in the global indices in the short-term.
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