The index has entered the "high optimism zone" as the benchmark's one-year forward price-to-earnings multiple touches 20x.
At the peak of the Russia-Ukraine war, oil prices shooting to multi-decade highs and the heavy correction seen in June, very few people would have thought of the Nifty 50 index hitting a record high towards the end of 2022, which it did. The index gained over 3,500 points from the lows in June to scale new records.
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The recent surge has meant that the index has entered the "high optimism zone" as the benchmark's one-year forward price-to-earnings multiple touches 20x. Price to earnings ratio, or the P/E ratio, essentially shows how much investors are willing to pay for each rupee of future profits. Right now, it’s twenty times and that’s considered a relatively expensive deal.
According to research by ICICI Securities, every time the Nifty has traded in the 20x-22x price-to-earnings multiple range over the last two decades, its maximum returns over the next 12 months have not exceeded 3 percent.
Timothy Moe, Chief Asia Pacific Strategist at Goldman Sachs believes that although India's long-term strategic prospects are the best, if not among the best, 2023 will be a challenging year for investors looking for outsized profits.
Moe finds valuations in China and South Korea to be more compelling. China trades at 10 times forward earnings, with headroom for faster earnings growth as well.
He expects the Chinese offshore stocks to give 15-20 percent returns even from current levels.
Foreign investors will find Korea and China to be more attractive compared to India as money typically moves from higher valuation to lower valuation, according to Gautam Trivedi of Napean Capital. He believes that another $5 billion of inflows or outflows will have a deep impact on the market.
However, this does not necessarily mean that the Nifty50 stocks are primed for a fall. Data from ICICI Securities reveals that over the last two decades, the Nifty 50 has given positive returns two out of three times.
There are two ways valuations can correct. Either, the price goes down or the earnings growth gathers pace. The Mumbai-based broking firm expects better earnings growth as input costs ease. For instance, Crude prices falling below the $85 per barrel mark bodes well for companies who rely on the black gold as their key input item.
Similar sentiments were echoed by Amisha Vora of Prabhudas Lilladher who told CNBC-TV18 that India will continue to see a positive market even in 2023 despite the current valuations. "I don’t see huge cuts but a rangebound market," she said.
Also Read: Amisha Vora Speaks On Her Biggest Learnings From The Stock Market | Smart Money | CNBC-TV18
However, exporters may continue to have a tough time.
Market veteran Shankar Sharma expects the bulls to find a new gear going into the new year. "India is an expensive market but it doesn’t mean it will underperform," he told CNBC-TV18.
"I don’t know by what metric they call it expensive and therefore India needs to underperform. (They) pick data points to suit that point of view irrespective of whether the data makes sense or not. My view is simply that 2023 is going to be even better than 2022,” he added.
Sharma expects strong returns from small cap stocks and companies that are regional market leaders for the products / services that they sell. Some of his top picks from the broader market include Rama Pipes, Kamdhenum and Sumit Woods.
Sharp falls and better rebounds and record highs, 2022 has seen it all. Over to 2023!
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