Mumbai: While the emphatic victory registered by the Bharatiya Janata Party (BJP) in the recently held state assembly polls is expected to take equity markets to new highs on hopes that the government would initiate further reforms to support growth and investment in the economy, analysts are little cautious on account of expensive valuations and subdued corporate earnings growth.
According to them, the markets could see some headwinds in the short term that could cap a major upside. “I think investors should focus on stocks where there is valuation comfort or wait for a decent correction to enter the market,” said G.
Chokalingam, founder and MD of Equinomics Research and Advisory Services.
“The poll outcome would definitely boost investor sentiments as the strong support enjoyed by the ruling party at the centre provides sufficient confidence to investors about long-term political stability necessary for the continuation of reform policies. However, the question is whether the rally will be able to sustain momentum in the short-term as domestic fundamentals are yet to keep pace with valuations.
“The economic growth is yet to come out of the demonetisation shock. Corporate earnings growth is below double-digit numbers and bank’s credit growth is at multi year lows. So there are a couple of headwinds in the short term,” he added.
“Of course, concerns of markets getting expensive at the current valuation is also now emerging,” observed Vijay Singhania, founder and director, Trade Smart Online.
The S&P BSE Sensex is trading at a price-earnings multiple of nearly 22 times, which is high compared with 23 times underlying earnings reached in July 2016, which was a five-year high.
“With no material change in earnings estimates and no visible evidence suggesting the risk of consensus earnings downgrades seen over the past three consecutive years is now firmly behind us, the liquidity-driven expansion in valuations looks unlikely to sustain in the coming week. Given that the markets are overvalued, any negative news can trigger a knee-jerk reaction,” added Mr Singhania.