DSP Mutual Fund’s monthly report is always full of interesting charts and insights. This month’s report provides valuable insights into the valuations, potential risks, and opportunities.
Here are some of the highlights:
Nifty’s premium over EM peers is at the higher end
While we are still 20% below the peak of 94% premium we saw in late 2022, Nifty’s premium over its emerging market peers is now at 73%, nearly double its long-period average of 37%.
Considering our improving macroeconomic prospects, we may continue to have a decent premium over EM peers. But it is important to keep expectations in check going forward.
Tech Valuations Are Getting Closer To Post COVID Peak
This is an interesting insight from the DSP team:
A large rally in the technology sector has brought the PE ratio for various indices back to the expensive zone. On an adjusted basis (due to delayed earning recovery during COVID) this sector is now at the highest 12m fwd valuations, ever!
History shows it is prudent to remain conservative at such steep valuations even if the earnings trajectory is strong. The sector can face multiple headwinds of growth, slowing revenues, and trimming of valuation multiples.
Corporate Margin recovery aided by lower input costs - Will it continue?
A complete collapse of wholesale prices and input prices helped margins expand. This is likely to reverse in the next two quarters as consumer-level inflation has eased at a faster rate than wholesale prices.
Corporates have gradually taken the benefit of a decline in input costs. This trend is likely to weigh on corporate earnings in FY24. This can cause earnings growth to slow down and make Indian equities unattractive.
The current Market cap - GDP ratio is hovering at higher levels
While it is a very debatable indicator and is not recommended to be looked at in isolation, It is worth noting that while the ratio for US markets is 60% below the 2-year peak, we are now trading above the last 2 years’ High
