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ICICI Securities Report
Rising risk-free rate (bond yield) is resulting in equity valuation contraction which is accentuated by the rise in systematic risk due to geopolitical crisis – As articulated in our year ahead outlook for CY22 (Strategy Year ahead 2022), the pressure on equity valuations is emanating from rising ‘risk-free rate' (bond yields) and quantitative easing easing reversal.
Spike in ‘systematic risk' due to the Russia-Ukraine conflict accentuated the pressure on equity valuations. Systematic risk is receding as the global brinkmanship reduces (although far from over) over the Russia-Ukraine conflict while the effects of rising risk-free rate driven by rising inflation persist.
However, as long as bond yields do not flare up significantly hereon and earnings growth trajectory continues driven by robust exports, pent-up demand and improving prospects for the investment and credit cycle, Nifty 50 index earnings yield could sustain at 5% level (price/earning of 20 times).
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