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ICICI Securities Report
Nifty 50 price to earnings ratio (P/E) swings from -1 standard deviation in March 2020 to +1 s.d. in August 2020.
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Equity valuations after hitting -1 s.d. in March 2020 have swung to +1 s.d. – a function of the sharp rise in stock prices, equally sharp drop in post Covid-19 earnings and time value (four months rolled forward).
In our view, evidence of a slow but surely improving global economic environment, earnings beat in Q1 FY21 so far and continued commitment by central banks for further quantitative easing while maintaining record low interest rates – has the potential to keep markets expensive in the near term.
Equity markets have continued to be expensive in the post QE era (post 2010) with shallow corrections.
Having said that, we do acknowledge that the expensive P/E is also a function of bottom of the cycle earnings level (listed space profit after tax to Gross Domestic Product of approximately 2% in FY20) and other broader/ balance sheet valuation metrics like market cap to GDP and price to book ratio remain below average at 73% and 2.7 times respectively.
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