Correction fails to rein in expensive market valuation: Fund managers

Experts say if oil prices continue to rise, India's valuation premium-to-EM peers could narrow further

The Indian markets have seen double-digit correction from their all-time highs. However, valuations continue to remain in the expensive zone and further corrections cannot be ruled out, say the country’s top money managers.

While the Nifty price-to-earnings (P/E) multiple has come down from its lofty levels of around 28x in October 2021, it continues to remain above the historical average. Currently, the Nifty trades at around 21.5x its estimated 12-month forward earnings, compared to the long-term average of 17x.

Stocks continue to remain vulnerable to headwinds, such as flare-up in geopolitical tensions due to war between Russia and Ukraine, crude oil price surging past $100 a barrel, and imminent interest rate increases by the US Federal Reserve.

Experts say the ongoing correction could present a good buying opportunity for investors with a two- to five-year horizon.

A Balasubramanian, managing director and chief executive officer, Aditya Birla Sun Life Asset Management Company (AMC), says, “From India’s point of view, we have seen sharp corrections. Excess valuations have normalised. We are back on the growth path and will have limited downside from here on, with a relatively better upside.”

Last week, the Sensex fell 3.5 per cent, with stocks in the oil and gas, telecommunications index, and the small-cap space witnessing sharper fall. Last Thursday, the Sensex and the Nifty had posted their biggest single-day fall in 20 months, crashing nearly 5 per cent. However on Friday, the markets rebounded, and the benchmark Sensex rose 1,328 points, or 2.4 per cent, to end the session at 55,858, while the Nifty50 Index closed at 16,658, with a gain of 410 points, or 2.5 per cent.

Says S Naren, executive director and chief investment officer, ICICI Prudential AMC, “Despite equity valuation correcting from record highs, it is not as cheap as it was during March 2020. The short-term outlook remains unclear. We are not aware how long the Russia-Ukraine conflict will prolong. In case of an early resolution, a short-term trading rally in equities cannot be ruled out.”

Sustained selling by foreign portfolio investors (FPIs) have been weighing down market performance over the past few months. So far, FPIs have sold $9.3 billion worth of Indian equities and domestic investors have bought shares worth $8 billion.

From here on, markets will be keenly looking at the earnings numbers and oil prices. 

Says Anoop Bhaskar, head-equities at IDFC AMC, “Valuations have come off, given the markets have been correcting since the October 2021 highs.  What remains unclear is how the earnings forecast will move. Until now, we have had six straight quarters of earnings upgrade as companies remain positive on the future prospects. However, 2022-23 earnings could be downgraded, given the strength across crude oil, coal, and most base metals.”  

A major headwind for the domestic market is the spike in oil prices. Experts say if oil prices continue to rise, India’s valuation premium-to-emerging market (EM) peers could narrow further.

“The key concern for international equity investors is India’s excessive valuation premium over peers. The MSCI India Index is trading at a 12-month forward P/E premium of 75 per cent, compared to a record high level of 90 per cent over the MSCI EM Index. While we believe India deserves to command premium valuations, the recent spike in oil prices — which disproportionately impacts India — and slow progress on privatisation and other reforms may lead to some correction,” says Jitendra Gohil, director-head of equity research, Credit Suisse.

Given the uncertain outlook, fund managers say investors should continue with their systematic investment plans and have a large-cap bias.  

Says Jinesh Gopani, head of equity, Axis AMC, “At this juncture, large-cap remains attractive, compared to mid-caps and small-caps. While large-caps have demonstrated good earnings numbers, in mid-caps and small-caps, the earnings have not been great. Even now, they continue to trade at higher valuations.”