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NEW DELHI: Even as India’s equity market has seen a strong rally in the past one-and-a-half months, it may see a correction of 15% (Nifty) if there is a mean reversion of the spread between bond yields and earnings yields, said a global investment and financial firm.
Equity market analysts also feel that it is highly unlikely that benchmark indices will surpass previous highs as valuations have become expensive. In a report, titled “Unconvincing Market Rally”, analysts at Jefferies have pointed out that the rally has taken the yield gap to “uncomfortable levels”.
“India’s 10-year G-sec rate has fallen from the recent peak of 7.62% in June’22 down to 7.35%. However, the 12-month forward P/E (price to earnings) has gone up to 19.3x, driving the bond yield-earnings yield gap up to 2.2 percentage points, which is 113bps higher than average. A potential mean reversion would imply a 15% correction,” the analysts noted.
On the back of increased foreign fund inflow, easing commodity prices and a less hawkish stance by the US Federal Reserve when it comes to future rate hikes, India’s equity market has seen a major rebound after falling sharply in early June. The benchmark indices- Sensex and Nifty- at 58,853 and 17,525 as of Monday’s closing - are now in close vicinity of their all-time high- 62,245 and 18,604.
“Sensex and Nifty are unlikely to surpass the previous highs because valuations have become expensive and, therefore, there will be selling pressure at higher levels. Nifty is now trading at around 20 times FY23 estimated earnings. High valuation will cap the rally,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.
Deepak Jasani, head of retail research, HDFC Securities, however, says that the trajectory of the market remains up. Hence 17700-17800 on the Nifty may soon be attained and beyond that, they would have to closely track the global events for predicting the Nifty levels. According to Jasani, sustained fall in commodity prices has led to inflation fears receding and this could end the rate hiking cycle soon, a big positive for equity investors.
Meanwhile, Foreign institutional investors (FIIs), who were relentless sellers from October 2021 to June 2022, have turned buyers in July and the buying momentum continues in August with net buying of `13, 801 crore till August 8.
