Earnings yield of domestic stock markets is now less likely to fall below the 5% mark even as central banks continue their quantitative tightening process, said analysts at ICICI Securities. “… despite the ‘easing of nerves’ on interest rates, we believe we are still in a QT cycle, hence it is less likely that equity valuations will yield less than 5% or trade above 20x on a 1-year forward basis,” ICICI Securities said in a note. Analysts at the domestic brokerage firm believe that profit, credit and Capex cycles will continue to expand, helping valuations ahead.
Valuations in control
ICICI Securities noted that interest rates were supposed to act as gravity for stocks, and valuations were expected to contract as bond yields moved up and central banks started the process of unwinding quantitative easing (QE). “However, this fundamental effect was exacerbated by the Ukraine-Russia war and its effect on commodity prices, which fuelled the inflation print that was already impacted by unprecedented QE and robust demand,” analysts said. Now, with the US Federal Reserve sounding less hawkish than it did before and a significant rate hike cycle in the US comparable to that in the 1960s-80s looking unlikely, valuations are not expected to breach the 20x 1-year forward mark. Currently, Nifty’s forward P/E is at 19.3x.
Profit, credit and Capex in an uptrend
The domestic brokerage firm has further said that India’s profit to GDP ratio will remain in an uptrend, accompanied by an expanding credit cycle with under-control bad loans, and growing capital expenditure from the public as well as the private sector. The three key cycles — profit, credit, and Capex — are believed to be key for stock markets and analysts at ICICI Securities see them comfortably placed, boding well for equity markets. The combined Capex of government and listed corporates has risen from Rs 10-12 lakh crore range to more than Rs 21 lakh crore range in FY23. Meanwhile, profit to GDP may breach 4.5% in the current fiscal year.
What sectors and stocks to bet on?
“We continue to prefer the themes related to improving credit growth, investment rate and discretionary consumption,” ICICI Securities said. The brokerage firm has listed the following as its top stock picks; SBI, IndusInd Bank, SBI Life, L&T, NTPC, GAIL, UltraTech Cement, Tata Communications, Gujarat Fluorochemicals, Tata Motors, TVS Motors, Brigade, Phoenix Mills, Sapphire Foods, Titan, Greenpanel industries, and Centuryply.