Nifty: Nifty valuations expensive, but strong flows to support index

Mumbai: Amid sticky inflation and relatively elevated interest rates, Indian stocks have staged an impressive resurgence, with gauges across the capitalisation spectrum hitting record highs. However, the Nifty’s climb to Summit 20K has inevitably put the spotlight on relative valuations – and Mumbai is clearly an outlier among all the emerging markets on that score.

India’s primary equity gauges currently trade at a valuation of nearly 21 times one-year forward earnings, comparable with that seen in Japan or Wall Street. This valuation diverges from the more modest multiples of 11-13 times earnings prevalent in equity markets as diverse in economic heft and growth outlook as Singapore, Hong Kong, the UK, and China.

Although Indian markets have outperformed the emerging markets so far this year, they underperformed the developed countries. The MSCI India index gained 8.6% so far in 2023, compared with a 1.83% rise for the MSCI Emerging Market index or 3.36% for the MSCI Asia index. By contrast, the MSCI World index rallied 13.3% in 2023.

On historical averages, Nifty is trading below its five-year mean one-year forward earnings, whereas the US or emerging markets like Taiwan and Korea are trading above historical averages.

With growth prospects presenting challenges in the developed world and within major emerging, economies like China that is beset with internal demand problems, India is increasingly becoming an attractive destination.

“Valuations are still not very expensive as we believe this momentum can continue with FII and local flows sustaining at these levels,” said Ajay Vora, head of equities, Nuvama Asset Management.

“India is the only growth oasis available to large global funds at a time when FIIs as a whole are underinvested versus historical holdings.”The surge in midcap and smallcap stocks, fueled by liquidity, has propelled both the Nifty Midcap100 and Nifty Smallcap100 indices above their five-year average PE ratios. Therefore, analysts are advising savers to approach the markets with a degree of caution.

“While markets are aggressive in terms of valuation, mid-cap and small-cap stocks in particular, investors should clearly stay away from the noise and make an informed choice,” said Srikanth Subramanian, CEO, Kotak Cherry. “Meanwhile, the trajectory for broader markets from here onwards will depend on corporate earnings, inflation and interest trajectory, oil prices and of course, the geopolitical situation, all of which, at this stage, augur well for India.”

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