Market valuations: Road ahead for D-Street: What Buffett indicator and other valuation metrics are hinting at

A handful of valuation metrics suggest that valuations have gotten expensive on Dalal Street after the recent rally. At Thursday’s intraday level of 17,727.45, Nifty50 targets from some brokerages suggest 4% to 7% upside potential going forward.

BEER Ratio
On Thursday, the 10-year bond yield stood at 7.13%, while the one-year Nifty50 PE stood at 19.60, resulting in a yield value of 5.10 (1 /PE term or EPS/price).

That gives a BEER ratio of 1.398. The BEER index is a metric used to assess the relationship between bond yields and earnings yields. A rise above 1 suggests that the stock market has become undervalued.

“Long-term bond yields have risen 40 basis points in the last five months in anticipation of rate hikes by the RBI. After the recent correction, a cooling was seen in the BEER index. However, it is now It is trading above its LTA, indicating a slightly expensive equity market at current levels compared to the bond market,” Axis Securities said in a note.

M-cap-a GDP

The market capitalization-to-GDP ratio, also called the Buffett gauge, is down from a high of 112 percent but still trading above 107 percent, suggesting Indian stocks are expensive. According to the gauge, stocks are considered expensive when the value rises above the 100 level. For India, the 10-year average moving-cap-to-GDP ratio was 79 percent, as much of the economy is unlisted. bag is not formalized.

“The ratio has been volatile, reaching 56% of FY20 GDP in March 2020 from 80% in FY2019 and then recovering sharply to 112% in FY22. The ratio is now 107 % of estimated GDP for fiscal year 23,” he said in a note

Axis Securities noted that a similar upward earnings momentum, as seen today, was seen in fiscal 2010 earnings in the immediate aftermath of the GFC crisis, leading to an m-cap-to-GDP ratio of 95-98 percent. . With positive earnings momentum in the current cycle, he sees the relationship improving in times to come.

PE, PB multiples
Nifty50 trades at a 12-month PE of 19.6 times, in line with its LPA. But the three-time forward P/E is still trading at a 15 percent premium to its historical average.

On a retrospective basis, the Nifty’s trailing 12-month P/E at 22.8 times carries a 7 percent premium to its LPA of 21.3 times. At 3.4 times, Nifty’s trailing 12-month P/E is also trading above its historical average of 2.9 times at a 17 percent premium.

Others
The MSCI India Index trades at a 124% premium to the MSCI EM Index, above its historical average of 62%. Over the past 12 months, the MSCI India Index (up 4%) has far outperformed the MSCI EM Index (down 24%).

In terms of market capitalization, while the global mobile capitalization decreased by 15.9% or $19 trillion in the last 12 months, India’s mobile capitalization increased by 3.1% over the same period.

Meanwhile, Nifty50 is also trading at a 12-month return on equity (RoE) of 15.6%, above its long-term average.

What the analysts said
Motilal Oswal said the market rallied smartly in the last two months, erasing all of its decline so far this year.

“Nifty50 is now trading 2% higher YTD and is far outperforming global markets. With this rally, the index is now trading at 21x FY23E EPS, comfortably above its LPA, and offers limited short-term upside in “Our view. The upside going forward will be a function of stability in global and local macros and continued earnings delivery against our expectations,” he said.

BofA Securities has a Nifty50 base target of 18,500 for the current calendar. The brokerage sees the NSE barometer trading in the 17,000-19,500 range as key risks unfold.

kept its March 2023 Nifty target at 19,000, given the positive outlook for the earnings, credit and investment cycles. He doesn’t anticipate the earnings yield to break the floor of around 5 percent to the downside.

Axis Securities has a March 2023 target of 18,400 as it values ​​the index at 20 times FY24 earnings.

“We believe that while aggressive policy tightening will help curb inflationary pressure, persistently high oil and commodity prices will continue to pose challenges to the market multiple in the coming quarters. The current level of India’s VIX is at below the long-term average, indicating that the market is

in a neutral zone (not in a zone of panic or exuberance). The current setup is a ‘Buy on Dips’ market,” Axis Securities said.


(Disclaimer: The recommendations, suggestions, points of view and opinions given by the experts are their own. These do not represent the views of the Economic Times)

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