1. Indian markets overheated at 4-year high valuations?

Indian markets overheated at 4-year high valuations?

As the liquidity infusion by European Central Bank (ECB) fuelled a strong rally in global equity markets, benchmark Sensex...

By: | Mumbai | Updated: January 24, 2015 1:28 AM

As the liquidity infusion by European Central Bank (ECB) fuelled a strong rally in global equity markets, benchmark Sensex scaled its highest valuations in nearly four years.

ECB’s decision to commence monthly purchases of 60 billion euros worth of assets, between March 2015 and September 2016 sent equity indices soaring with European Stoxx 50 scaling a seven-year high. The move allayed concerns of drying liquidity as the US central bank looks to raise record low interest rates after concluding its third round of quantitative easing last year.

Joining its global counterparts on Friday, the 30-share index not only extended its record closing streak but also traded at a one-year forward price to earnings multiple of 16.3 times for the first time since January 2011. The Sensex ended the session at 29278.84, up 272.82 or 0.94%, in turn yielding 6.5% in 2015. The benchmark now commands a 9% premium to its 10-year average valuations.

Sensex-trade

In Friday’s trade several stocks from consumer goods and pharma space including HUL, Asian Paints, Nestle India, Cipla, and Dabur were also changing hands at record valuations in terms of trailing 12-month PE.

Despite rich valuations, experts seem confident about Indian market’s strong performance. According to Rakesh Arora, managing director and head of research of Macquarie, India being one of the better looking markets, it is bound to achieve its fair share of fund flow post this measure which increases liquidity in global markets.

“While we do not see substantial re-rating of the market hereon, the recovery in earnings growth could still yield upto 12% market return this year. I think earnings potential is under-estimated,” added Arora.

After corporate earnings in the first two quarters of fiscal 2014-15 failed to excite the street, analysts were quick to moderate their earnings expectations for FY16. The consensus estimates on FY16 Sensex earnings have come off from R1,902 in early November to R1,849.

Recently Kotak Institutional Equities highlighted risks to its FY16 estimates citing several hurdles like high non-performing assets in the banking system, dismal capex cycle.

While it remains positive on India’s medium-term economic story, the domestic brokerage house notes that the current market valuations factor a lot of positives even before “any meaningful pick-up in economic activity or earnings upgrade”.

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