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Are the Indian Markets Overvalued? 💸

Earnings season has begun, but unfortunately on a dismal note - TCS posted the slowest growth in three years, HCL Tech was an all-round disappointment, Wipro’s numbers were subdued and guidance was weak, and Federal Bank had a weak quarter.

Additionally, recent events have been casting a doubt on the strength of earnings this quarter, in the backdrop of a worsening global macroeconomic situation, and softening domestic consumption.

  • The West heading into slower growth, and possibly a recession has been an increasing risk for stocks across the sectors of technology services, metals and chemicals

  • The IMF and World Bank recently slightly downgraded India’s GDP forecast for modestly slowing domestic consumption, steel mills have been cutting prices because of weaker demand, and the RBI bulletin mentioned slowing personal consumption

Many fear the recent rally in the markets makes it a high-risk situation if earnings were to disappoint. After all, the 13% rally this financial year has resulted in perceivably steep valuations. But that doesn’t seem all that valid. The market doesn’t yet seem to be screaming overvalued.

Here’s why:

  1. At 20x one-year forward earnings, the Nifty is still close to its own long period average, and not at a premium, for it to be alarming

  2. From the time back in October 2021, when the markets previously recorded all-time high levels, earnings have increased by 20% whereas the markets are up 13%; making current valuations cheaper than the previous time

  3. True, the Indian markets are trading at a massive premium to MSCI World (25% premium), MSCI Asia (ex-Japan) (55% premium) and MSCI Emerging Markets (75% premium). But where else would global investors put their money right now? No wonder, despite these seemingly premium valuations, FIIs have been pumping money into India!

Despite all that talk of slowing domestic consumption, and pressure from exports, India is still expected to be the fastest growing economy. On top of that, earnings are also expected to grow at a 15% CAGR over the next two years.

Growth should be reason enough to keep high valuations elevated, despite some natural short-term falls in the market.

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