The 50 per cent gain in the 50-share benchmark Nifty since the end of March, coupled with a 22 per cent fall in earnings estimates of companies has led to a massive jump in the price-to-earning ratio of stocks.
Stock markets are ignoring fundamentals due to availability of liquidity and Indian equities’ near-term valuation are in the expensive zone, the wealth management arm of Deutsche Bank said on Tuesday. The 50 per cent gain in the 50-share benchmark Nifty since the end of March, coupled with a 22 per cent fall in earnings estimates of companies has led to a massive jump in the price-to-earning ratio of stocks, it said.
This has taken the valuations to a 10-year high, which “certainly rings a cautionary bell” for investors in the short term, it said in a report. Markets have been rallying despite an unabated rise in COVID-19 infections, continuing restrictions on sectors like travel and shopping, uncertainties on the jobs front and border tensions with China.
“With liquidity driven markets largely ignoring fundamentals, it is important for investors to understand where valuations lie in the Indian equity markets,” the report said. It, however, said the equity markets are ignoring the current financial year as a “blip” and are looking at FY22 for recovery. The markets are anticipating normalcy returning in the economy and hence corporate profitability, it added.
In the near term, equities are susceptible to volatile shocks caused by political issues like US elections, local Indian state elections, tensions with China or Pakistan, and health-related issues which can involve a second wave of infections, delay in vaccine availability or administration for such a large population, it said.