Indian equities face a potential near-term performance impact as their valuation shifts from stretched to distended, following a 20% return in 2023. Bloomberg data reveals that the current one-year forward price-earnings (P/E) multiple for the Nifty 50, a key benchmark, is at a two-year high of 22. This marks a 40% premium compared to the long-term average valuation of 15.7.Notably, a year ago, the valuation premium stood at 19%.
According to an ET analysis, the Nifty 50’s valuation premium has exceeded 40% on only 1.4% of trading days since January 2005. Notably, it is now the second-most expensive index globally, trailing only the Nasdaq. The majority of Nifty 50 constituents, specifically those in consumer, IT, and industrials sectors, are currently trading at a premium to their respective long-term average valuations. This is unusual for these sectors that traditionally maintain reasonable valuations.
Furthermore, a significant portion of Nifty companies, 98%, and all S&P BSE Sensex companies are currently trading above their respective 200-day moving averages. This places them among the highest in global indices.This valuation trend is concerning as India is no longer anticipated to lead in earnings growth for the fiscal year 2025. Consensus estimates indicate a growth of 14-18% for domestic companies in the coming fiscal year. In contrast, emerging markets like South Korea, Taiwan, and South Africa are expected to outperform in 2024.
According to an ET analysis, the Nifty 50’s valuation premium has exceeded 40% on only 1.4% of trading days since January 2005. Notably, it is now the second-most expensive index globally, trailing only the Nasdaq. The majority of Nifty 50 constituents, specifically those in consumer, IT, and industrials sectors, are currently trading at a premium to their respective long-term average valuations. This is unusual for these sectors that traditionally maintain reasonable valuations.
Furthermore, a significant portion of Nifty companies, 98%, and all S&P BSE Sensex companies are currently trading above their respective 200-day moving averages. This places them among the highest in global indices.This valuation trend is concerning as India is no longer anticipated to lead in earnings growth for the fiscal year 2025. Consensus estimates indicate a growth of 14-18% for domestic companies in the coming fiscal year. In contrast, emerging markets like South Korea, Taiwan, and South Africa are expected to outperform in 2024.
Nifty 50 premium
Nifty’s consistent annual gains until 2023 have propelled it to be one of the top-performing indices and its P/E multiple has now surpassed two standard deviations from its mean for the first time in two years. This historically signals either a subdued equity performance or a sharp decline, as observed in January and October 2021 when the forward P/E multiple dropped from 22.6 to 16.8.