When stocks plunged to a multi-year low last month, the gap narrowed to just about -8 basis points, something not seen since 2009
This year’s slump in the Sensex
means that India’s stocks are near the cheapest in relation to bonds
since the aftermath of the global financial crisis. Fair-value analysis suggests they could bounce back if global growth posts a V-shaped recovery.
The 25 per cent tumble in the index has meant that stocks currently offer an earnings yield of about 5.25per cent, compared with the domestic benchmark 10-year yield of about 6.50per cent.
The difference of about -125 basis points compares with a 10-year average of about -265 basis points, suggesting that the gap will widen eventually. When stocks plunged to a multi-year low last month, the gap narrowed to just about -8 basis points, something not seen since 2009.
Assuming earnings per share of about Rs 1,500 on the Sensex
stocks (which represents a decline Rs 1,643 from December 31) are all paid out as dividends and using a required rate of return of 10 per cent and forecast growth of 4.75per cent for the current fiscal year, a fair value of the index would be around 28,600.
Of course, the required rate of return of 10 per cent in a world where most G-10 yields are less than 1per cent may be too high even providing for the vagaries of emerging markets.
Still, India’s growth —predicated on favourable demographics —is likely to be strong in the longer term, though the economy is bound to feel the drag effect of the coronavirus-induced lockdowns through the April-June quarter at the very least.