Are stock valuations stretched? Here's what Abhishek Basumallick has to say
If you consider an average earnings growth of even 10% and inflation of another 6%, then the PE would shrink further going further.
With the Sensex crossing 60,000 and Nifty within a handshaking distance of 18,000, there are a lot of questions on the valuations, or rather the overvaluation in the market. Roughly 25%, 991 out of 4008 stocks, are still below their 200 day moving average. Although that does not mean much in terms of valuation, it does indicate that we are not in a completely gung-ho bull market.
Valuation is dependent on many factors but primarily on the intrinsic value and the transactional value of a stock. The transactional value tries to incorporate external factors such as market optimism/pessimism, liquidity conditions, demand and supply gaps etc. As we have seen there is a deluge of global liquidity that has been unleashed by central banks across the world. Large parts of that money have been transferred directly to retail investors which have found their way into risk assets like cryptocurrencies, commodities and equities.
In addition, a lot of fresh money has also come into markets with the arrival of Gen Z. The pandemic has forced people to stay at home and trading has been a key way people have engaged themselves.
Nifty 500, which is a broader market index, has a price-to-equity (P/E) of 28 and price-to-book (PB) of 4.3 along with a 1% dividend yield. This is at a time when the last 12 months of corporate earnings have probably been suppressed due to the pandemic. If you consider an average earnings growth of even 10% and inflation of another 6%, then the PE would shrink further going further.
The trick is not in trying to time the markets in an absolute sense. As an investor, you should be focused more on the businesses you hold and look at valuations, growth prospects and risks in them rather than fixate on index levels.
At present, the benchmark Sensex traded nearly 150 points up at 60,196 led by gains in index majors Reliance Industries, HDFC Bank and Maruti Suzuki. On the other hand, the NSE Nifty index was up nearly 38 points higher 17,890.
(The writer is chief equity advisor, Intelsense Capital; views expressed are personal)