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Systematix Research Report
Benign sentiment overriding hawkish Central Banks, dwarfing market risk premium:
Markets are increasingly factoring in a hyper goldilocks' scenario which assumes that high inflation in the U.S. and advanced economies will glide back to normal without triggering a recession.
Consequently, market risk premium has dipped to the lowest first quartile typically associated with an ultra-easy monetary policy. These presumptions have ratcheted up valuations and revived portfolio flows into emerging markets, including India which has underperformed due to rich valuations (year-to-date at 4-5%).
These extrapolative assumptions can run out of fuel as latest data suggests that the overheated conditions in the U.S. and advanced economiesBenign sentiment overriding hawkish CBs, dwarfing market risk premium have not ebbed and central banks have voiced renewed hawkishness. Upside inflation surprises could be the key monitorable.
Projected Nifty earnings per share 70% higher than pre-Covid trend is untenable:
Dwarfing risk free premium has escalated valuations and forced extrapolation of the episodic bounce in earnings for FY22-23 into consensus earnings projection for FY24E-25E (15% average, 16.5% five-year compound annual growth rate). Compared to the pre-Covid trajectory the projected EPS has an average deviation of 70%, the highest ever!!
Comparatively, for the U.S. S&P 500 this deviation is a modest 7%; 2023 is expected to remain flat. Our comparative macro assessment indicates weaker degree of sustenance for India versus the U.S. Hence, we foresee substantial scope for downward revisions across most sectors.
A combination of realistic EPS (Rs 790, 15% cut in consensus) and an optimistic multiple (23 times), the fair value for Nifty 50 is flat.
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