On a high! Nifty’s valuations sail past 2008 levels

The stock market rally since April and the subsequent surge in the one year forward PE multiple comes at a time where most listed companies are likely to report a flat or negative earnings growth.

By Urvashi Valecha

After rising by 47% from its March lows, the benchmark Nifty50 is currently trading at a one year forward price earnings (PE) multiple of 20.51 times. This is higher than the frothy valuations of 19.7 times seen in 2008 before the market crashed. Such rich valuations have experts worried, who say that the markets are in the ‘expensive’ territory.
According to data from Bloomberg, the benchmark Nifty in 2008 reached the peak value of 19.7 times one year forward PE which makes it higher than the current one year forward PE of 20.51 times.

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In March this year, the one year forward price earnings (PE) were at 14.09 times, according to Bloomberg data. Market experts agreed that the current valuations have led to the stock markets becoming expensive but have also said that the global financial crisis and the current situation are not strictly comparable.

This is because of the variance in interest rates and the corporate earnings during both times. U R Bhat, director, Dalton Capital Advisors (India), said, “The 2008 financial crisis is somewhat different from the current scenario because it was essentially a banking crisis and there was the template of extensive quantitative easing by the central banks that was followed everywhere. Here, the level of uncertainty is much higher because every segment of the economy is affected with a virtual breakdown of all economic activity without any clarity on a return to normalcy.

Also, the interest rates at that time were higher and the global economy was on an up- cycle whereas, currently interest rates are lower and the economic cycle had started dipping even before Covid-19 struck. The inverse relationship between interest rates and market multiples is also at play at this juncture.”

The stock market rally since April and the subsequent surge in the one year forward PE multiple comes at a time where most listed companies are likely to report a flat or negative earnings growth. The markets are currently trading in the ‘expensive’ territory because of the rise in liquidity on the back of lower interest rates. Additionally, the strong upward movement in the top 15 Nifty stocks that are representing an index level of more than 14,000 is causing the surge in the benchmark’s valuations.

Gautam Duggad, head of research – institutional equities, Motilal Oswal Financial Services, said, “Valuations are not cheap now. But there is more nuance to it. As we have been witnessing since three years, top-15 stocks of the Nifty are driving the bulk of the returns. In fact, Nifty comprised of top 15 stocks is representing an index level of 14,000 and more while Nifty comprised of rest 35 stocks is representing 8000 levels.”

Even as the stock markets can rise further due to the surging global liquidity, the possibility of a correction cannot be ruled out. Sorbh Gupta, associate fund manager, Quantum Mutual Fund, said, “If the liquidity and fiscal measures continue globally then markets may move up despite bad economic data. Any liquidity shock or further deterioration in economic data or large scale lockdowns can result in market correction.”

On the other hand, some market experts are also of the view that if the currently ‘expensive’ stocks rise further than the current levels would be missed out. Deepak Jasani, head- retail research, HDFC Securities, said, “Going by traditional valuation methods, the Indian markets seem fairly valued to expensive. The easy money policy is expected to continue at least for the next two quarters, so expensive may get more expensive and investors may be left with missing out feeling. Bulls expect that the turnaround time for the economy could be much faster than what the street is expecting so, the current high PE ratios are justified in their opinion. They feel PE ratios do not matter when times are euphoric or depressing. Currently the markets are going through a period of exuberance.”

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