• 19/08/2022 5:22 pm

#As market valuations turn expensive, brokerages pick these 27 stocks

In muted earnings expectations for Q1FY21, beats were much higher than misses and that was one of major reasons and confidence booster for equity market not only in India but globally.

Sunil Shankar Matkar

The benchmark indices have given stellar 50 percent return each in just four months with Nifty Price-to-earnings ratio turning from negative 1 standard deviation (SD) in March 2020 to positive 1 standard deviation in August 2020.

After recording a high of 12,430 in January, Nifty fell 40 percent to 7,511 in March due to COVID-19 crisis. Many countries around the world announced partial or complete lockdowns in the first half of the year to contain the spread of COVID-19. This brought economic activities to a jolting halt hurting corporate earnings.

From the low point, the index jumped 50 percent to hit 11,300 in July, thanks to the liquidity pumped in by global central banks. Other factors that were at play are progress on vaccine for COVID-19, increasing economic activity during unlock and better-than-expected-to-in-line earnings growth in June quarter.

Experts feel the valuations definitely turned expensive, but on the other hand, the economic environment has also started improving.

“Equity valuations after hitting -1 SD in March 2020 have swung to +1 SD – a function of the sharp rise in stock prices, equally sharp drop in post COVID-19 earnings and time value (four months rolled forward). In our view, evidence of a slow but surely improving global economic environment, earnings beat in Q1FY21 so far and continued commitment by central banks for further QE while maintaining record low interest rates – have the potential to keep markets expensive in the near term,” ICICI Securities said.

Equity markets have continued to be expensive in the post QE era (post 2010) with shallow corrections, it added.

US Federal Reserve and the ECB, in their latest policy meet in July, remained committed to quantitative easing (QE) with an accommodative stance and maintained low interest rates.

In fact, there has been negotiations between Democrats and Republican for another stimulus package in the United States as the impact of first package of around $3 trillion announced in May has been reducing, which could lift markets further.

Having said that, ICICI Securities does acknowledge that the expensive P/E is also a function of bottom of the cycle earnings level (listed space PAT-to-GDP of around 2 percent in FY20) and other broader/balance sheet valuation metrics like Market Cap to GDP and P/B remain below average at 73 percent and 2.7x respectively.

Given the sharp rally, experts feel the upside from here on seems to be limited but select quality stocks could continue their strong journey along with outperformance in broader space compared to benchmark indices.

“Given the high P/E valuations, our 1-year forward returns expectation from the benchmark Nifty50 remains in low single digit, while select stocks will continue to generate alpha,” ICICI Securities said.

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