Valuations of the equity markets remain at a premium, but concerns over earnings persist.
The benchmark stock indices, the Sensex and the Nifty, have remained strong over the last few days. However, there are experts who reckon that this could be time for some correction and consolidation. According to experts at ICICI Securities, the Nifty, based on average target prices for each of its members, has a fair value of nearly 5,740. Considering the annual historical volatility of around 17 per cent, the index has depicted it could have a range of around 730 points from the fair value. This implies a range between 5,000 and 6,400 for the Nifty 50, they add. At current levels, the Nifty is demanding the most expensive valuations compared to its global peers.
The forward price to earnings at 17.5 is seen expensive. With target prices implying around six per cent upside from the current levels, implied broker estimates for the index are very bullish, say analysts.
At Nomura Financial Advisory, the view is, “From a strategic perspective, we recommend moving to a tactical neutral on India. We remain bullish on pure-rate cyclicals (banks and real estate). Richly-valued sectors like consumer or capex plays could come under pressure in the short term.”
The belief is that the recent system-wide squeeze in liquidity and emerging signs of easing economic activity — evident from numbers of industrial production, six core infra industries, imports, railway freight and import traffic at ports — might be heading into a period of market consolidation, especially after the recent rally from the “local” bottom on May 25, they added.
While results have been steady, most earnings estimates have not been met. This could be detrimental in the short term, given the expensive valuations.
According to analysts at Morgan Stanley, “A sequential decline in earnings growth is in the offing.” The market then would look at some consolidation in the times to come. However, the catch is that the India story still remains strong and growth here will better most of its rivals, which will attract fund flows.