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Indian Market Valuations Quite Expensive: Kotak Securities


Published on: September 7, 2022 | Updated on: September 7, 2022

The strong outperformance of the Indian market over the past few months reflects investors' belief that the Indian economy is in a relatively stronger position versus other economies: Kotak Securities equity strategy report (Photo: AP)

MUMBAI: "The strong outperformance of the Indian market over the past few months and in the past fortnight probably reflects investors’ belief that the Indian economy is in a relatively stronger position versus other economies," said a equity strategy report.

 We hope that the Indian economy and market can live up to the high expectations implied in expensive valuations of the market. Economic recovery has been somewhat subpar so far and twin deficits are well above comfort levels even without factoring in any potential energy price ‘shock’, said a strategy report titled "Decoupled or Detached" by Kotak Securities.

 While the US market equity benchmarks Dow Jones Industrial Average has corrected 5.14 per cent, S&P 500 is down by 5.60 per cent and tech index Nasdaq Composite has fallen by 8.7 per cent during the last one month period, The Nifty 50 index is up 0.57 per cent while Sensex is down just 0.57 per cent during the same period.

"This may be true for growth but not so for other macroeconomic parameters (BoP, fiscal, inflation). Also, India’s post-Covid economic recovery has been subpar so far," said Kotak Securities.

"Indian market valuations are quite expensive. Earnings yield is low relative to bond yield when compared with periods with similar levels of bond yields. Lastly, increasing medium-term risks linked to climate change and geopolitics warrant higher caution on earnings for equities," the report said.

"Decoupling is not possible in reality," warned Kotak Securities.

"We note that markets may decouple in the short term (for whatever reasons) but economic linkages will inevitably result in some ‘relationship’ between markets too. The Indian economy is too interlinked with the global economy for economic or market decoupling in reality. A global slowdown will have severe repercussions for India’s BoP (already challenged) through lower exports, meaningful slowdown of late and lower capital inflows. At the same time, imports may stay high, especially if energy prices were to stay high; no respite in the past few months," the report said.

"A global slowdown may or may not affect global energy prices given the dominance of supply-side factors (global geopolitics among several other) for energy prices," it added.

Whether Indian market was "detached from macro reality? A lot will depend on energy prices in the next few months," the report said.

"The positive sentiment for the Indian market may also reflect a somewhat ‘detached’ view of India’s growing twin deficits given the disproportionate focus on growth. India’s CAD(current  account deficit)/GDP and GFD(gross fiscal deficit)/GDP are much higher versus other economies," Kotak Securities said
"Both have deteriorated meaningfully over the past few years and elevated energy prices have cut India’s foreign currency reserves(USD 561 Billion)."
 "A few years of such high twin deficits could pose medium-term challenges for the economy through elevated government borrowing and steady decline in foreign currency reserves. The recent decline in global oil prices may have improved India’s near-term macroeconomic outlook. However, the global energy outlook is quite uncertain. We would not rule out energy price ‘shocks’ in the next few months," the report said.

"Higher-for-longer inflation, climate change, geopolitics, demand new mindset and models. We are not sure if the Indian market is factoring in risks from short-term factors such as higher-for-longer inflation unlike other markets," the report said.