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Scientists, doctors, engineers have lifted Nifty to 11,500 from 11,000 in 7 months

In valuation terms, the index is looking expensive compared with its long-term moving average.

Updated: Aug 20, 2018, 11.42 AM IST
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The 50-share index traded at a P/E of over 28 times on Monday compared with its 10-year average of 20.90.
It took seven months for NSE’s Nifty index to move from 11,000 to 11,500 level. This period remained highly volatile for the domestic equity market amid trade war tensions, sustained outflow of foreign portfolio money, rising crude oil prices and a depreciating local currency.

After scaling the 11,000 mark for the first time on January 23, the index hit a low of 9,951 on March 23. However, buying in 22 index stocks took it above 11,500 on August 20.

Shares of Bajaj Finance and Bajaj Finserv have rallied 67 per cent and 42 per cent, respectively, since January 23. Twenty other blue chips – HUL, TCS, M&M, Reliance Industries, Infosys, Asian Paints, Kotak Mahindra Bank, Tech Mahindra, IndusInd Bank and ITC – have rallied between 10 per cent and 30 per cent during this period.

In terms of valuation, the index is looking expensive compared with its long-term moving average. The 50-share index traded at a P/E of over 28 times on Monday compared with its 10-year average of 20.90.

Basant Maheshwari, Co-Founder & Partner Basant Maheshwari Wealth Advisers LLP in a tweet said, “Comparing the average Nifty P/E across stocks is like comparing the average salaries of a scientist, doctor, engineer and part-time gardeners & drivers – high quality secular growth and low quality cyclicals. Nifty has more scientists, doctors, engineers now, than it did 20 years back.”

Among other Nifty stocks, GAIL, YES Bank, Sun Pharma, HDFC Bank, Eicher Motors, Titan, Cipla, Axis Bank, HCL Technologies and HDFC have gained up to 10 per cent since January 23.

On the other hand, Tata Motors, Vedanta, HPCL, Bharti Airtel and UPL slipped up to 38 per cent between January 23 and August 17.

The BSE Sensex also hit a fresh record high of 38,266 in early trade on Monday. Gains in capital goods, metals, realty and banking stocks amid firm Asian cues aided the market.

From a valuation perspective, analysts are not too comfortable with the current level of the market.

Even though the Sensex typically trades at a premium to its peers, it is currently trading at a higher-than-normal premium relative to its emerging market (EM) peers. For instance, from a five-year average perspective, India typically traded at a premium of 18 per cent to the median P/E of nine emerging markets. However, today India trades at a whopping 37 per cent premium to median P/E of EMS, Ambit Capital said in its recent report.

The 30-share index currently trades at a 21 per cent premium to its 10-year average P/E ratio, Ambit said.

The recent rally in the stock market has more support from domestic flows than FIIs. On a year-to-date basis, foreign portfolio investors have taken out some Rs 1300 crore, while domestic institutional investors have poured in more than Rs 68,300 crore.

“Many emerging markets, maybe not so much in India, are under severe distress. I’m talking about some very high-growth economies, like those in Eastern Europe. And we have economies like Poland, which are doing well. Yet, these stock markets relative to the US are at multi-decade lows. Liquidity in markets like the Philippines and Indonesia has completely dried up. India has been fortunate that it has had a domestic investor base, which has kept the market humming,” New York-based investor and author Ruchir Sharma told ET in an interview.

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