Supported by strong economy and a universe of fast-growing companies, India is now the most expensive market among its peers. While the Nifty trades at a price to earnings (P/E) multiple of around 21 times on estimated current earnings, South Korea trades at 14.75 times, China (11.3 times), Malaysia (14.55 times) and Taiwan at 18.1 times.
India also trades at a huge premium to the MSCI EM Index on a one-year forward basis, though this premium has narrowed from levels seen in September 2021 and September 2022.
“We may be getting into an over-bought zone given the momentum in the markets but I don’t think it’s a bubble, that’s for sure,” Andrew Holland, CEO, Avendus Capital Alternate Strategies, observed.
Nilesh Shah, MD & CEO, Kotak AMC, believes there is a momentum in the markets as earnings for the broad market are growing at about 1% a month and both the fundamentals and flows are strong. He cautions, however, that prices seem to be running ahead of fundamentals except in a few pockets.
Foreign portfolio investors (FPIs) have pumped in a net $16 billion into equities so far in 2023, the biggest in three years. Local liquidity has been in abundance with equity mutual fund schemes having attracted inflows for a straight 30 months. Inflows from Systematic Investment Plans (SIPs) nudged `16,000 crore in August even as SIP accounts are now at a record 70 million.
Shrugging off the surge in crude oil prices and the elevated levels of inflation, the benchmark indices continue to scale new peaks highs. On Thursday, the Nifty closed at 20,103.10, a record high. The market’s valuation is nudging $4 trillion. This compares with a market capitalisation of $1.78 trillion for Korea and Taiwan’s $1.83 trillion.
The bullish sentiment notwithstanding, there is a fair bit of concern on valuations of mid-caps and small-caps. Shah points out typically mid-caps should be valued lower than large caps and small-caps lower than mid caps. “However, this is not the case now and normally such situations do not end well,” Shah said.
Strategists at Kotak Institutional Equities believe there has been no meaningful change in the fundamentals of most midcaps and small-caps to justify the rally and in fact, in many cases, they have worsened. “The primary driver of the rally appears to be irrational exuberance among investors, with high return expectations, and purchase decisions being driven by the high returns of the past few months,” they opined.
Others like Amit Sachdeva, strategist at HSBC Global Research, are less concerned. “The midcap index’s valuation premium to the market has risen to 34%, inching closer to past bull market phases peaks of 40%. However, past cycles suggest broader bullish phases can still persist past such peaks for few more months, if larger macro factors stay favourable,” he wrote recently.
Avendus Capital’s Holland believes one can’t generalise across stocks and sectors. “Not everything is over-valued,” Holland said.
In an interview to Bloomberg Television last week, Chris Wood, global head of equity strategy at Jefferies LLC, said India remains his favourite market in Asia.