Moneycontrol Readers' Poll: Almost 75% of retail investors find current market valuation worrisome

Nifty settled above 11,600 on September 16 and while the index is expected to trade higher in days to come, retail investors think that the current valuation of the market is not in sync with the economic reality and a correction could be in the offing.

In a social media poll conducted by Moneycontrol, most respondents expressed their concern about the current valuation of the market.

In a poll on Twitter, nearly 74 percent of respondents expressed their discomfort with the current market valuation.

On Linkedin, 78 percent said the current market valuation is worrisome.

On September 16, Nifty closed the day at 11,605 with gains of nearly one percent and formed a bullish candle for the second consecutive day.

Technical indicators suggest the current pullback can extend up to 11,650-11,700 zone that is strong hurdles on the higher side.

"Nifty gave a breakout above 11,450 in the recent past and have entered the bullish phase for the short-term. On the higher side, the target of 11,900 can be expected in the next few weeks. Trend and breakout support on the downside is seen at 11,175 levels below which we expect volatility to increase," said Sahaj Agrawal, Head of Research- Derivatives at Kotak Securities.

Consolidation in the offing?

At this juncture, it appears that the Indian market may follow the trends of the global markets due to the lack of fresh domestic triggers.

Even though a deeper correction is not expected, a healthy one could be on the cards due to factors such as the US election, geopolitical tension between India and China, dollar appreciation, slower economic recovery against expectation, the threat of the second wave of COVID, and any further extension in COVID vaccine beyond December.

Valuations of global as well as Indian markets are in a rich zone which may not sustain for long.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities pointed out that the MSCI World Index, which is a good barometer for world markets is trading at 20.5 times on a year forward basis as compared to its 10 year average forward PE of 15.1 times.

"Even the two-year forward PE of the MSCI World Index is close to its previous peaks of the last 15 years. Similar is the case with valuations of the top three US Indices namely, Nasdaq Composite, S&P 500 and Dow Jones Industrial Average. These extremely rich valuations are on the back of 13-15 percent earnings de-growth seen in CY20E and nearly 30 percent earnings growth forecasted for CY21E," Oza said.

Oza underscored Nifty50 is trading at nearly 22 times on one year forward PE as compared to previous peaks seen at about 19 times on forward valuations.

"The Nifty Midcap 100 index is trading even higher than the Nifty50 which suggests some kind of overvaluation in mid-caps vis-à-vis the large-caps. The 10-year average forward PE of Nifty50 works to nearly 16 times and a current forward PE of 22 times indicates it is trading nearly 3 standard deviations above the 10-year average," Oza said.

Looking at the global and domestic valuations, markets worldwide are ripe for a correction but few factors like low bond yields, suppressed Dollar Index and heavy liquidity infusion by central banks are keeping valuations at elevated levels, Oza explained.

The volatility in the US market due to the presidential elections can spoil the party.

"As we approach US elections, there could be some kind of volatility and possible correction in the US markets which in turn can lead to correction in other global markets, including India," Oza said.

Oza added that for a structural longer correction we need bond yields and the Dollar Index to rise sharply along with inflation and liquidity infusion to go down drastically. When these factors play out or threaten to play out that time we could see a structural longer correction in global markets.

The market may see a correction soon but it may not be as deep as witnessed in March.

"Since we have seen a deep correction already in March, the market may not see such deep correction. But a healthy correction looks logical as it will make the market rational," said G Chokkalingam, Founder and Chief Investment Officer at Equinomics Research and Advisory.

Since March 2020 lows, the Indian market has rallied smartly, mirroring the trend in most global markets.

The market rallied on doses of liquidity by central banks. Besides, the forward-looking market anticipated things will come back to normal, as and when a vaccine for the pandemic is found.

Hemang Jani of Motilal Oswal said one cannot rule out the correction or consolidation phase. The extent of correction would depend upon global markets and incremental economic data points in India.

There are other factors too that may trigger the outflow of foreign funds from the market, causing a correction.

With MSCI India's valuation premium to EM currently well above the historical average, we expect institutional flows to slow down and markets to consolidate near-term, said BofA Securities.

FIIs inflows into Indian equities continued to be robust in August at nearly $6.3 billion, highest in five years.

While India saw strong FII inflows, most EMs, as per BofA Securities, witnessed FII outflows in August: South Korea (-$2.3 billion), Taiwan (-$2.2 billion), South Africa (-$1.3 billion) and Thailand (-$0.9 billion).

With MSCI India's valuation premium to EM currently more than 25 percent above the historical average, BofA Securities thinks Indian markets could now consolidate near-term and incremental FII flows could slow down.

Flows in September so far have already been nearly flat (-$153 million), BofA Securities highlighted.

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