One year of Nifty's lifetime high: Domestic equities stuck in a loop

It has been one year since the domestic market punched in its lifetime highs. On October 18, 2021, the benchmark Nifty50 Index had closed at 18,477. Since then, domestic equities have been on a roller coaster, with the Nifty dropping to 15,294 on June 17 this year.

Currently, the index is at 17,186 — 7 per cent below its lifetime high.

The fall in the Indian market is far subdued, compared to many global peers that have slipped into bear-market territory.

A hawkish pivot by global central banks due to runaway inflation, rise in geopolitical tensions in the midst of a Russia-Ukraine stand-off, disruption in commodity prices, and fears of global recession have knocked the wind out of global market sails.

Relatively better prospects and strong domestic liquidity are seen as reasons for India’s outperformance vis-à-vis global peers over the past year.

Since October last year, the Indian market has seen a flight of foreign capital in excess of Rs 2 trillion. However, a large part of this has been offset by buying by domestic mutual funds and direct retail flows. This hasn’t prevented Indian markets from getting derated.

Last year, the Nifty commanded a one-year forward price-to-earnings (P/E) multiple of nearly 23x. Currently, India’s P/E is down to 18.6x — nearly 20 per cent discount, but still high versus the historical average of about 16x.

While mid-cap indices have fallen in line with the Nifty, the correction in small-caps has been more pronounced. The Nifty Smallcap 100 Index is currently 21 per cent below its zenith.

An enfeebled US dollar and surging bond yields have weighed on market valuations, observe experts. The rupee has declined nearly 10 per cent against the greenback over the past year. Meanwhile, the yield on the 10-year government security has hardened nearly 120 basis points over the past 12 months to 7.47 per cent.

Higher bond yields make the risk/reward ratio inimical to equity investing. Only a third of the top 500 stocks have managed to deliver positive returns over the past year. Nearly 37 per cent of the Nifty 500 components are down at least 20 per cent since October last year.

Given the global headwinds, it is unlikely the market will outstrip its lifetime high accomplished last year.

In a report last week, BofA Securities lowered its Nifty target from 18,500 to 17,500, citing weakening macro, higher crude, rupee depreciation, and global slowdown.

“In the near term, higher crude, slowing global growth, along with a depreciating currency, could create a downward spiral of macro risks — ballooning current account deficit and overshooting fiscal deficit. Given this, we believe further earning cuts cannot be ruled out. We cut our Nifty trading range to 16,500–18,500 and lower our base target to 17,500 (from 18,500 earlier),” wrote BofA’s strategists, led by Amish Shah, in a note.