As equity benchmarks look to end the year with more than 25% gains, market valuations are closing in on discounts with their long-term averages.
Such valuation convergence raises doubts over the sustainability of the current market rally, given the subdued fundamentals. However, experts say investors could still consider an entry into select stocks offering value, especially from cyclical sectors.
?Although financials of these stocks may take some time to improve, some companies from capital goods, infra and banking spaces continue to see investor interest amid their beaten-down performances since 2011,? said Dipen Shah, head of research, Kotak Securities.
The Sensex is currently trading at about 3-4% discount to both its trailing and forward price-to-earnings-multiples averages for the last 10 and seven years, respectively.
According to Bloomberg data, the 30-share benchmark, which is hovering near its 19-month high, is trading at 16.34 times its trailing 12 -month earnings and quoting at 13.9 times its 2013-14 earnings depicted at about R1,400.
Between May and June this year, when the Sensex neared its 2012 low, it traded at about 20% discount to these long-term valuation measures.
While market observers acknowledge the valuation disparity at the sectoral level ? some FMCG stocks look expensive and most public sector banks appear cheaper ? they stress on a stock-specific approach to detect value at reasonable prices.
According to Prasun Gajri, CIO, HDFC Life, cheap valuations of some cyclical stocks from the banking and capital goods space have turned them attractive. ?From a time horizon of 12 to 18 months, even the asset quality of PSU banks appears to have bottomed out and a turnaround in the interest rate cycle could add to the attractiveness of the sector,? he added.
Andrew Holland, CEO, Investment Advisory at Ambit Capital, however, believes that even as a liquidity and expectation-driven rally could benefit them, a ?convinced purchase? of such sectoral stocks may only occur when the fundamentals improve.
While rising benchmarks appear to be discounting some of the positives, including a sustained push on the reforms front, experts point out that the Street may be getting hopeful of the execution of these announcements.
?Primarily, the market is integrating lot of expectations, including the reforms trajectory and that of additional liquidity flowing into emerging countries like India that demonstrate a relatively better economic scenario, including GDP growth,? said Debasish Mallick, MD & CEO, IDBI Mutual Fund.